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Category: Credit Insurance

The Sudden Bankruptcy Filing of Vital Pharmaceuticals Inc / Bang Energy

The Sudden Bankruptcy Filing of Vital Pharmaceuticals Inc / Bang Energy

Could a Large Manufacturer be a Credit Risk?

Vital Pharmaceuticals is the third largest energy drink manufacturer in the U.S. and owns the Bang Energy brand. Now it is filing bankruptcy in the wake of multiple lost lawsuits, the latest of which awarded $293 million to Monster Energy for its false advertisement of its “Super Creatine” ingredient’s health benefits.  This is one of the largest awards under the Lanham Act. Vital Pharma’s sudden fall into bankruptcy highlights the need for suppliers to consider credit insurance to protect against buyer non-payment and ultimately their balance sheet.  Vital Pharma owed more than $500 million to unsecured creditors.

Vital Pharma Fast Facts and Timeline

  • Vital Pharmaceuticals Inc, a private company, located in Pembroke Pines, FL manufactures and distributes sports supplements under the name VPX, Redline Power Rush, an energy supplement, and Bang Energy, an energy drink.
  • Vital Pharmaceuticals introduced the Bang Energy drink product line in 2012.
  • Bang Energy was marketed as a “performance-enhancing and sports nutrition beverage” due to its “super creatine” ingredient.
  • According to Marketwatch the global energy drink market size was valued at $57 billion in 2021 and expected to reach $75 billion by 2027. Vital Pharmaceuticals / Bang Energy is the third largest energy drink manufacturer behind Red Bull Energy (38% of global market share) and Monster Energy (35% of global market share).
  • Vital Pharmaceuticals recently lost two lawsuits and settled a third which forced them to file for bankruptcy protection.

Key Legal Dispute Dates

  • 2018: Monster Energy Co filed a complaint in U.S. District Court for the Central District of California against Vital Pharmaceuticals, alleging false advertising.
  • 2020: PepsiCo and Bang Energy enter into exclusive distribution agreement
  • 2020: Bang Energy terminated the distribution agreement. PepsiCo sued for breach of contract.  An arbitrator ruled in PepsiCo’s favor that they were still the exclusive distributor.
  • June 2022 Bang Energy CEO Jack Owoc announced that all disputes with PepsiCo had been settled.
  • July 2022: In a separate lawsuit Monster Energy and Orange Bang (a separate beverage company) were awarded $175M through arbitration award for trademark infringement
  • Sept 2022: A jury sided with Monster Energy in its lawsuit against Bang Energy and awarded Monster $293M for false advertising regarding its “super creatine” content.
  • Vital Pharmaceuticals filed for Chap 11 on Oct 10, 2022. The three largest unsecured creditors were:
    • Monster Energy Company – $292,939,761
    • Orange Bang, Inc. – $214,757,614
    • PepsiCo – $115,000,000

Low Credit Risk Until Bankruptcy Filing

Vital Pharmaceuticals was a growing company in the expanding energy drink sector.  There wasn’t any indication, even in late September, that they would file for bankruptcy protection in early October.  Suppliers would have needed to be aware of the status of the lawsuits and the size of the potential jury awards while also reducing credit terms to avoid a loss.  The Schedule F includes a number of large, sophisticated companies extending significant credit to Vital Pharmaceuticals.  It remains to be determined how much, if any, they will recover through the re-organization process.  One supplier, using credit insurance as part of a comprehensive credit risk mitigation strategy, was very thankful that they had a policy in place.  The loss would have had a significant impact on the equity in their business.

Trade Credit Insurance

Trade credit insurance protects suppliers against non-payment due to insolvency and slow-pay.  The Vital Pharmaceuticals bankruptcy filing highlights that even when a buyer appears to be a low credit risk, unseen external factors can substantially increase the buyer’s credit risk. This lack of visibility can expose suppliers to significant credit losses. Even beyond legal liability, other external factors can silently increase the risk of a buyer, such as loss of a significant customer/revenue, loss of financing, change of ownership, etc.

About Securitas

Since 2004, Securitas Global Risk Solutions has helped clients develop credit and political risk solutions. As independent trade credit and political risk specialists, we are focused on developing comprehensive solutions that meet the needs of our clients. Please feel free to call us with any questions, or if we can be of any assistance.

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Inflation expectations yet to decouple from ECB target

Inflation expectations yet to decouple from ECB target

Used with Permission from atradiuscollections.com

Despite rising inflation in the eurozone, we argue it has not yet sprung loose from the ECB target in the medium term

  • Inflation in the eurozone is high and well above the 2% target set by the European Central Bank.
  • The current high inflation rate is to a large extent driven by pandemic-related factors and energy price increases related to the Russia-Ukraine war. We also observe that inflation expectations have not yet decoupled from the ECB’s official target rate. This makes us to believe that inflation will come down in the short term. A simple calculation exercise confirms this picture.
  • We conclude that inflation projections in the medium term have not yet sprung loose from the official ECB target and the current moderate intervention policy appears justified.

ECB ends wait-and-see

 

High inflation is the current hot economic topic. In June, inflation was running at over 11% in the Netherlands; for the eurozone it was nearly 9%, which is surely a record. It is also sure that the inflationary bite is being felt, particularly in the purchasing power of lower income groups. The question is, how long will this high inflation last? In recent months, energy prices have gone through the roof (see figure 1), with geopolitical developments playing a major role. If the pressure on these prices abates, inflation will also ease off. In principle, the monetary authorities should then not need to intervene much, if at all

But the ECB has decided not to wait any longer. In its press conference of 9 June, it announced its intention to raise its policy rates by 0.25% in July, and to end its bond purchasing programme. Moreover, it indicated a further interest rate increase in September, this time of 0.5%. But that will depend on how inflation pans out.

In this article we will look at inflation in the eurozone. Using simple calculations, we will explain how, in our view, the current high level of inflation in the eurozone will not be sustained. The main reason for this view is that a recurrence of the energy price explosion is unlikely. In addition, eurozone unemployment, which is far from negligible (over 7%) is weighing on wage rises, thus limiting second round effects of inflation. In this respect, the ECB acts as a lock on the door. Yes, inflation expectations are rising, but have not yet de-anchored from the official target of 2%.

 

Energy price in HICP index 2015-2022

Major impact of energy price rise

 

Energy prices have played a major role in the high inflation of recent months (figure 2). Yet this accounts for a relatively limited share (11%) of the total price index. However, on a year-on-year basis, the energy component has shot up by as much as 42% in June, which had a very sizeable effect on the total price index. Thus nearly half of HICP inflation in June this year – 4.0% points – can be attributed to higher energy prices. Food (including alcohol and tobacco) accounted for 1.9% points, and core inflation stood at 2.6% points.

Inflation Eurozone (year-on-year change in the monthly index

Instead of looking at the contributions of the components energy, food and core, if we focus on the rise of these individual categories, the numbers are even more spectacular: besides the 42% for energy (year-on-year), we see 8.9% for food and 3.7% for core inflation. Clearly, inflation is not only happening in energy prices, food prices have also risen and even core inflation is currently running well above 2%.

Rising energy and food prices may be regarded as temporary. However, when core inflation goes up, this is a sign that inflation is filtering through to the rest of the economy. Moreover, core inflation has already been above the target rate of 2% since October 2021. This will also have played a part in the ECB’s decision to adjust its inflation expectations upwards for 2022 and 2023. That said, there is still an expectation that inflation will subside, a consideration that is reflected in the moderate extent of ECB’s intervention.

Reasoning for declining inflation

 

Although the ECB has factored in a decline in inflation, it did not give specific reasons for this in its press release. But of course, it has its reasons. We will first look at the arguments in favour of this view. We then present our calculations, based our core argument: a recurrence of the energy price rise is unlikely.

First, underlying factors which have kept inflation moderate in recent decades have not disappeared. At most, they have been somewhat weakened by the pandemic. These factors include (i) globalisation, which weighs on prices thanks to competition from more suppliers; (ii) digitalisation, which makes pricing more transparent; (iii) weak wage growth: from low labour participation, a decline in trade union membership and competition from foreign workers, partly through migration; and (iv) population ageing, which leads to lower aggregate demand as consumer spending declines with age. While globalisation (and migration) may have cooled a little from the pressure of the pandemic and geopolitical tensions, a reversal of globalisation would appear to be out of the question.

Second, the rise in inflation from the second half of 2021 was initially triggered mainly by the recovery of economic activity after the pandemic. During the pandemic, aggregate demand was propped up mainly by support from governments. But because services such as hospitality, events and travel were mostly closed, demand shifted to goods such as electronics, household appliances and (outdoor) sports goods. This increased the pressure on the international supply chain, which was reflected in long delivery delays and price increases. There were logjams in transport, particularly in container transport, which also pushed up prices. Now that the pandemic has become more endemic in nature, and most sectors have re-opened, the demand for services will increase. Relative demand for goods will lessen, as will the pressure on international supply and transport chains. Thus one source of inflation will lose its strength. This process will be further reinforced by a decline in demand on the back of reduced purchasing power – itself a direct result of inflation. Early signs of this process are already visible in the easing of supply chain pressure (figure 3).

Eurozone global supply chain pressure index, standard deviation from the average

Third, for future inflation development, it is important that current inflation is sufficiently absorbed by the economic agents to prevent new imbalances in the economy. In this respect, wage development is crucial. It is important that companies are not saddled entirely or largely with the burden of inflation, because they would then set in motion a spiral of price and wage rises. So far, this is not the case in the eurozone. Wage rises remain limited at around 3% (figure 4).

negotiated wages, % year-on-year
This falls well short of the 8% inflation rate and will act as a brake on any tendency of European companies to shore up prices.  In the wage bargaining process, important considerations are the above issues such as unchanged inflationary pressure from underlying factors and easing pressure in the supply chains. The role of the ECB as guardian of the euro also plays a part: do the economic players expect that the ECB will ultimately be able to guarantee price stability through adequate policy response? These elements coalesce in the inflation expectations. Although these have gone up, they do not currently give reason for undue concern (figure 5).
Inflation expectations eurozone
The picture generated by this reasoning is one of inflation that is not sustainable at the current high level. We now substantiate this further with our calculations which are based on a temporary rise in the energy and food indices.

Calculations confirm the picture

 

We calculate the expected inflation from June 2022 to end 2023 in a simple manner. This involves looking at the year-on-year percentage changes in the monthly index – for example the difference between June 2022 and June 2021. We took the following approach.

For the period concerned, we calculated the price index of the components energy, food (including alcohol and tobacco) and core. The basic premise for the development of the indices of energy and food from June 2022, is the average of the rise in the sub-index for the period 2015-2019. Thus our conclusion is that the current state of energy and food price development cannot last. We will explain why.

With regard to the energy prices, we base our view on the underlying reason for the recent price rise: the war in Ukraine, and in particular the ensuing sanctions. These have pushed oil and gas prices to unprecedented heights. However, any further rise would require a second shock, such as major disruption to the Russian oil and gas supply. This could conceivably be an effective boycott of Russian oil or Russia turning off the gas supply to Europe. However, we don’t see this happening yet. True, with its sixth package of sanctions, the EU has aligned with the G7’s oil boycott, but the EU boycott will not take effect for another six months. Moreover, the G7 is working towards limiting the effect of the sanctions on oil prices. Yes, it appears Russia is reducing gas deliveries. But it is highly questionable whether gas deliveries will be fully stopped; it is certainly not in Russia’s interest to lose this easy source of money – especially at current high prices – to fund its war. Russia’s actions in this regard may prolong turbulence on the energy markets. However, we concur with the expectations of the World Bank and the OECD that energy prices will gradually stabilise. The same is true for food prices, with the pressure on supply from the production and delivery problems in Ukraine being absorbed by ramped-up production in other countries, such as the US, Argentina and Brazil.

Expected inflation Eurozone (% m-o-m change index)
Figure 6 shows the result of the calculations: eurozone inflation will have peaked in July this year and the rate will slide gradually until the end of the year, followed by an acceleration of the downward trend from early 2023. This will culminate in inflation of just over 2% by the end of 2023.

Just to give an idea of the effect of the calculation: In June, the energy index stood at 156 and we estimate it to reach 160 by the end of 2023. Food inflation will go from 121 to 124. These numbers represent increases of 2.5% and 2.4% respectively. Our estimates for core inflation are based on a shorter and more recent period, i.e. the average rise of the sub-index from July 2020 to June 2022. We factor in a second round effect of current inflation as well as the underlying (downward) pressure on inflation that we have explained above. For the forecast period until end 2023, the core inflation index will rise from 111 to 114, which represents an increase of 3.3%. To calculate the HICP, we used the weights of the sub-indices from June 2022.

The figure clearly shows that the energy component has an over-sized role in current inflation. This effect is evident from the (expected) energy sub-index, which, according to our calculations will reach 157 in December 2022 – a rise of 26% on the December 2021 index. However, if we look at the index for March 2023 and compare it with March 2022 when it stood at 154, we see a rise, i.e. inflation, of just over 2%. In other words, the inflationary spike of 2022 is matched by its mirror image in a drop in 2023. This is a simple, but powerful mathematical conclusion which does not require any further assumptions. The current high inflation is not here to stay.

Our calculations result in an average HICP of 7.9% in 2022 and 3.5% in 2023, with core inflation running at 3.6% and 2.9% respectively. This compares with the ECB’s reckoning for HICP of 6.8% and 3.5% respectively for 2022 and 2023 and average core inflation of 3.3% and 2.8%. Thus inflation expectations have not yet sprung loose from the official target rate, and the ECB’s current moderate policy appears justified.

John Lorie, Chief Economist
john.lorie@atradius.com
+31 20 553 3079

Theo Smid, Senior Economist
theo.smid@atradius.com
+31 20 553 2169

Dana Bodnar, Economist
dana.bodnar@atradius.com
+31 20 553 3165

You can read the original article on Atradius’ website at https://atradiuscollections.com/global/reports/economic-research-inflation-expectations-yet-to-decouple-from-ecb-target.html

About Securitas

Since 2004, Securitas Global Risk Solutions (“Securitas”) has helped clients worldwide develop credit and political risk transfer solutions that provides value on numerous levels.  As an independent trade credit and political risk insurance brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of clients, ensuring complete understanding of policy wording and delivering excellent responsive service.

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Liquidity matters: Corporates may need half a trillion of additional working capital requirement financing in 2021

Liquidity matters: Corporates may need half a trillion of additional working capital requirement financing in 2021

Used with Permission from eulerhermes.com

Summary

      • In 2020, Working Capital Requirements in the West increased (+5 days in North America and +1 day across Western Europe) while it dropped in regions such as Latin America (-3 days), Eastern Europe (-2 days) and APAC (-1 day). Inventory management and government support explain most of this divide. In the US and EU, severe lockdowns pushed companies into a “forced” stockpiling mode, which was fortunately tempered by the “invisible bank”, i.e. the very accommodating management of payment terms between customers and suppliers, , partly financed by liquidity support measures. 2020 saw a surge in WCR across industrial sectors: +13 days for metals to 95 days, +9 days to 117 days for machinery, +4 days to 84 days for paper and +3 days to 87 days for automotive.
      • Looking ahead, we estimate that large companies will face a record increase of EUR453bn in WCR  in 2021, equivalent to +4 days of turnover, up to EUR8.4trn. This comes in a context of the strong demand rebound triggered by the grand reopening, alongside severe shortages in inputs, labor and final goods. The surge in WCR already observed in most developed economies will ramp up in 2021, while WCR would remain well under control in a few emerging countries, notably in China (-6 days). In both the US and the Eurozone, we expect WCR to rise by +4 days.
      • While all sectors will see a rise in WCR, consumer goods sectors could see the biggest jump. Last year was a year of divergence. We expect many global sector WCR levels to resynchronize on the upside in 2021, with retail (+9 days up to 52 days) and agrifood (+8 days up to 81 days) seeing the largest rises, followed by industrial sectors such as metals (+7 days up to 103 days), transport equipment (+5 days) and machinery (+4 days).
      • Stocks matter: Along with the “just in case” model of inventory management, and the end of “just in time” for most sectors, rebuilding stocks in an environment of supply shortages will be the key driver of the increase in global WCR, notably across Western European countries. In 2020, Days Inventory Outstanding surged by +5 days in North America and by +1 day in Western countries, while the drop in inventories across Emerging Markets made up for the stockpiling in developed economies. In 2021, we expect pent-up demand and the massive restocking policies of Western companies in the midst of global supply-chain disruptions to weigh notably on their WCR levels. However, in 2022, reduced supply bottlenecks should mitigate the soaring inventory fallout on developed countries’ WCR.
      • State support matters, too: The additional WCR needs represent less than 20% of non-financial corporates’ net cash positions in the Eurozone. However, total deposits of non-financial corporates cover at best 30% of total debt, with France the most vulnerable. Our estimations for the Eurozone show that NFCs’ net cash positions (deposits – new loans up to EUR1mn) increased by EUR547bn in 2020, almost three times more compared to 2019. This compares to EUR102bn of expected additional WCR needed to be financed in 2021, i.e. 17% of 2020 net cash positions. Since the end of 2020, net cash positions have continued to increase in the Eurozone (EUR38bn as of May 2021), with Germany (+EUR18bn) and Italy (+EUR7bn) on top of the list, while in France net cash positions fell by -EUR9bn. However, if the grace periods on state-guaranteed loans are not extended beyond 2021, cash buffers will decrease as total deposits on non-financial corporates cover 30% of total debts at best, with only 23% in France, one of the lowest ratios.

A glance at the change in Working Capital Requirements in 2020 for 36 countries reveals a divide between Advanced Economies and Emerging Markets for the very first time. The WCR level in the West increased (+5 days in North America and +1 day across Western Europe) while it dropped in regions such as Latin America (-3 days), Eastern Europe (-2 days) and APAC (-1 day). Inventory management explains most of this diverging trend (see Appendix).

In EMs, total inventory levels were minimally impacted as demand for goods picked up and has remained strong since the summer of 2020. In contrast, the more severe lockdowns in the US and EU pushed companies into a “forced” stockpiling mode. France, Denmark and Spain, for example, saw their inventory outstanding level surge by +5 days, +7 days and +10 days, respectively, last year. The very accommodating management of payment terms between customers and suppliers fortunately tempered these increases in inventories in some Eurozone countries. France, for example, succeeded in seeing its WCR drop by -2 days over the year, thanks to longer payment terms to suppliers (+6 days) in relation to shorter payments from customers (-1 day).

Massive stockpiling always weighs on WCR levels and cash balances accordingly. However, it is not always a bad thing: it can pay off if it arises from companies’ expectations about future demand growth, to be sure of being able to cater to clients’ orders on time after the crisis period. Conversely, if stockpiling results from an inability to deplete current inventories fast enough, it usually brings on cash shortages for the company, which could end up going bust in the worst case. The different levels of change in WCR from one sector to the other also depend on where they are located in the global supply chain scale in regards to the final consumer. The more a sector is capital-intensive, the more it undergoes a significant WCR rise as any supply disruptions are more expensive when a plant has to temporarily stop production due to a lack of inputs.

2020 saw a surge in WCR across industrial sectors (see Figure 1): +13 days for metals to 95 days, +9 days to 117 days for machinery, +4 days to 84 days for paper and +3 days to 87 days for automotive. These sectors were forced into stockpiling during lockdowns instead of shutting down their plants because of how high closure costs usually are for capital-intensive activities. Overall, metals and machinery were the two losers in regards to last year’s changes in WCR: The Covid-19 crisis has highlighted how inflexible their manufacturing tools are in case of a sudden change in the economic cycle, especially from the inventory point of view. Conversely, the sectors most exposed to the boom of remote work saw their WCR level massively benefit from resilient demand and destocking. This includes electronics ranging from semiconductors to computers (-13 days down to 94 days) as the sector saw skyrocketing demand in 2020. Household equipment saw a fall in WCR of -5 days (down to 92 days), thanks to better-than-expected sales during lockdowns while construction also registered a fall in WCR (-4 days down to 76 days) as the sector cashed in on the shutdowns of new building programs to sell off all inventories left.

The two special cases are pharmaceuticals and automotive, which both saw their respective WCR rise by +3 days, pushing them up to a ten-year record high: 106 days of turnover for the former and 87 days of turnover for the latter. In spite of selling its medicines through drug stores, the pharmaceuticals sector unfortunately bears a very high level of WCR because drug makers usually deal with public hospitals and social security programs with very long payment terms. Conversely, pharmaceuticals has always generated a high level of cash flow so that it can easily support longer payment terms. The high WCR in the automotive sector has more to do with car dealers closely linked to carmakers by the fact that they share the same brand and usually support the funding of the largest part of car inventories.

WCR, just like Days Sales Outstanding (DSOs), tend to increase both in recession and recovery times. In Figure 2, we try to graph the effect that unprecedented liquidity support measures by governments have had – and continue to have – on compressing WCR variations. Initially designed to avoid hysteresis effects (bankruptcies and unemployment), and unlike the 2008-09 crisis, the Covid-19 crisis response has been very much focused on avoiding liquidity gaps and preserving B2B flows and credit. Using IMF data on liquidity support measures (state-guaranteed loans, moratoria on debt, subsidies) and our own WCR calculations (2021 forecasts explained hereafter), we see the lifeline from governments to help suppliers (the invisible bank) continue to finance their clients. In Europe, for instance, the WCR change has been quite limited, alongside very generous liquidity bridges. Also note that initial conditions (WCR levels, structure of the economy), as well as varying intensities of the crisis or recovery, certainly explain specific country developments (Spain and China for e.g.) In large Emerging Markets, we see that liquidity gaps may have been only partially bridged and that corporates will be faced with binding financing constraints as they return to pre-crisis activity.

Figure 1: Global sector WCR in 2020, in number of days (worldwide average)
Figure 1: Global sector WCR in 2020, in number of days (worldwide average)
Sources: Bloomberg, Euler Hermes, Allianz Research

 

Figure 3 summarizes the results of our WCR forecasts in 2021 for a few Western countries. France clearly appears to be the weak link in our sample as the country whose cash needs are likely to be the highest in order to finance the additional WCR of EUR31bn. Germany and Spain follow, with EUR17bn of additional WCR each, albeit a difference in level (EUR383bn for Germany and EUR109bn for Spain). The Netherlands’ additional WCR of EUR15bn expected in 2021 has to be monitored because this country was previously known for keeping its WCR low. Positioned as a big European platform country for international trade, it is no doubt paying more attention to enough restocking to avoid any fallout of supply-chain disruptions on its WCR. With its additional WCR of EUR153bn expected for the ongoing year, the US accounts for a third of the global additional WCR of EUR453bn needed to be funded in 2021, for a total of more than EUR2600bn.

Figure 3: Breakdown and 2021 forecasts of WCR amounts (EUR bn)

In 2021, nearly every country will see an increase in WCR levels, but the rise will be more significant across the northern hemisphere, given the dynamism of demand in the Eurozone and its massive restocking policies against very low levels of inventories (see Figure 4). Hence, we expect an increase of +4 days on average in WCR across Europe in 2021, ranging from +6 days in France and +7 days in Switzerland to +10 days in Austria and a more worrisome +15 days in the Netherlands. For the US, we expect a rise of +4 days in 2021.

Similarly, when looking at sectors, the rise of WCR is likely to affect all 18 that we monitor, in line with the return to growth prompted by the grand reopening and massive vaccination campaigns, which will improve demand prospects. Hence, we expect WCR to resynchronize on the upside in 2021 at a global level, with the largest increases seen in sectors linked to final consumer goods or closely related to them. Yet, sectors considered as strongly industrial should also see their WCR rise in 2021, such as metals, pharmaceuticals, transport equipment and machinery due to surging commodity prices, which will raise their production costs.

Figure 4 Inventories by sector
2021 WCR forecasts by sector (number of days)
Global demand by sector (new orders + backlogs of work)

Which sectors are the ones to watch? Agrifood (+8 days up to 81 days), retail (+9 days up to 52 days), transport (+ 4 days up to 32 days) and household equipment (+5 days to 97 days). We also expect large rises in WCR for metals (+7 days up to 103 days), pharmaceuticals (+5 days), transport equipment (+5 days) and machinery (+4 days). Last year, the transport equipment (aeronautics) sector benefited from the large destocking of Boeing’s 737 Max planes since these were allowed to fly again from the last quarter of 2020.

The WCR levels for electronics (+1 day), energy O&G (+2 days) and telecom (+0 days) are expected to remain around their long-term historical levels. Their WCR are better suited to withstand any upward pressures despite the acceleration of the recovery around the world. Now more than ever they have become instrumental to the new industrial background taking shape through global digitalization, which puts them in a strong position to set payment terms for both customers and suppliers.

Our WCR forecasts highlight a ten-year high level in 2021 for some sectors, notably agrifood (at 81 days), retail (52 days), pharmaceuticals (111 days), automotive (92 days) and machinery (121 days). These record levels could put companies at risk if they are denied additional credit lines from banks when they need to finance their operating cycle on a rise.

Furthermore, agrifood and retail are two specific sectors strongly destabilized by the booming remote work and e-commerce models, respectively. Not only has e-commerce prevailed over brick-and-mortar retail throughout the world, but also it is faster than before the Covid-19 crisis. Yet, meeting customers’ demands online usually requires e-commerce players to bear a higher level of stocks than retail outlets. It is all the more required now that consumption patterns have shifted towards durable goods, and government income support strengthened demand, while transportation services were limited. The conjunction of booming demand for consumer durables from Asia and supply-side bottlenecks created by sanitary restrictions in ports and terminals have kept shipping costs elevated for several months and made it all the more important to keep high inventories in the West.

However, stockpiling can also result from an inability to deplete current inventories fast enough. As a result, it can usually bring on cash shortages that could even push a company to go bust in the worst case. If replenishing current inventories, particularly in the northern hemisphere, is fueling the rise in WCR globally, changes in payment terms granted to clients should add to this upswing over 2021. This is because a relaxation in payment terms is usually an easy way of getting back market shares that could have been definitively lost by the supply disruptions that occurred last year due to the pandemic.

 

In the Eurozone, companies’ available cash surpluses generated by massive state support policies (notably direct liquidity support and state-guaranteed loans) appear to be significantly higher than the looming additional amounts of WCR.

Our estimations for the Eurozone show that the net cash positions (deposits – new loans up to EUR1mn) of non-financial corporates increased by EUR547bn in 2020, almost three times more compared to 2019. This compares to EUR102bn of expected additional WCR needed to be financed in 2021, i.e. 17% of the 2020 net cash positions. Since the end of 2020, net cash positions have continued to increase in the Eurozone (EUR38bn as of May 2021), with Germany (+EUR18bn) and Italy (+EUR7bn), on top of the list, while in France net cash positions fell by –EUR9bn, which suggests non-financial corporates have started to use their deposits in addition to new loans for operating activities (see Figure 6). German companies benefit from half of the French amount of cash surpluses stemming from public support policies back in 2020 (EUR93bn against EUR197bn in France). The positive point is that the first five months of 2021 show a further rise in cash generation of EUR18bn, which will fully cover the additional WCR expected in 2021. This stems from either additional public support programs or German companies’ profitability generating positive cash flows again since the beginning of the year alongside recovering export flows.

Figure 7 Available cash positions in 2020

While reassuring, it is important to bear in mind that these excess net cash positions are also needed for the repayment of all other debts. Therefore, this cash cushion might evaporate much quicker than expected, notably if the grace periods on state-guaranteed loans are not prolonged beyond the end of 2021 and companies need to start reimbursing their debt. Looking at the share of total coverage of the stock of loans & debt securities by total non-financial corporates’ deposits, France and Belgium appear to be most vulnerable despite the high levels of available cash. Indeed, total deposits cover 23% of total stock of total debt against around 30% in Germany and Italy (see Figure 8).

Fig 8 Share of coverage of total stock of loans and debt securities

About Securitas

Since 2004, Securitas Global Risk Solutions (“Securitas”) has helped clients worldwide develop credit and political risk transfer solutions that provides value on numerous levels.  As an independent trade credit and political risk insurance brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of clients, ensuring complete understanding of policy wording and delivering excellent responsive service.

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900 West Valley Road Suite 701, Wayne, PA 19087

Call Us

484-595-0100

Is Global Trade in Quarantine?

Is Global Trade in Quarantine?

The outbreak and spread of the Coronavirus disease (COVID-19) has stoked global fear of a pandemic.  Disruptions to business in China and other affected countries are rising as are worldwide disruptions to travel and trade as countries scramble to put safeguards in place to stem the spread of the virus.

For companies with overseas operations and business, this latest public health crisis underscores the importance of planning for the unexpected, including an annual comprehensive assessment to properly mitigate the risk of doing business overseas where situations can change quite rapidly.

Like earlier epidemics such as SARS in 2002-2003 and the Ebola outbreak of 2014-2016, efforts to contain transmissions involve a range of decisions to quarantine the sick and minimize human-to-human contact.  This proves particularly difficult in a global economy in which the flow of goods and people are both commonplace and vital, even in areas of the world seen as remote or rural.  Outbreaks raise public concerns and even outright fear in both nearby countries and worldwide, and can lead to political decisions in non-crisis countries to suspend travel or block the transport of some or all goods.  These actions are often sudden and unforeseen, with reaching consequences for complex supply chains.

Stories of the economic impact of Coronavirus are developing.  At present, the disease remains mostly centered in China and that country is expected to see the most drastic economic impact.  Already analysts are predicting both a significant first-quarter economic slowdown and an overall GDP decline for 2020 as many businesses remain closed or people remain at home, especially in the auto-manufacturing hub of Wuhan at the center of the crisis.  With China’s economy already cooling, (GDP fell to 6.1% in 2019 from 6.6% in 2018) it remains to be seen what the impact will be on China’s export-driven growth, particularly electronics exports or its $280 billion per year textile exports.

Companies doing business in China are in a scramble to adjust their operations and specific industries are noting shocks.  American exporters of agricultural products and machinery are already feeling the effects of the slowdown, as China struggles to keep food supply chains open in the face of quarantines and declining consumption.  West Coast port traffic is already reporting a significant decline in traffic. Other notable examples include the cruise ship industry and tourism in general, beset by virus outbreaks on ships and growing travel restrictions. In addition, the luxury goods industry, which enjoys popularity among wealthier Chinese consumers and tourists, is projecting a $40 billion decline in sales in 2020.

The Coronavirus outbreak highlights the need for international companies to engage in a range of contingency planning to anticipate how to adapt business operations in the face of risks such as public health crises, natural disasters, energy shortages, slow or broken lines of communication and political risk.  An entire field of business continuity planning encourages companies to regularly assess operational and financial risk by actively planning and developing working contingency plans.  Proper insurance coverage, just one aspect of this, is crucial so that cash flows and financial obligations can be protected, even in the case of unforeseen breaks in trade.

Since 2004, Securitas Global Risk Solutions (“Securitas”) has helped clients across the United States develop trade credit and political risk transfer solutions that protect businesses from buyer non-payment and geo-political risks.  As a specialty independent brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of their client.

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The Psychology of Risk

The Psychology of Risk

When to buy Trade Credit Insurance

Risk management often requires a counter-intuitive approach, challenging ourselves to think through whether we have accurately assessed the possible risks that face our businesses. Planning for a range of outcomes requires an evaluation of downside risk. This runs counter to the optimistic view we naturally have for our efforts in building individual enterprises. Yet the recent bankruptcy of Toys-R-Us highlights why, even when times are good and indicators seem positive, “black swan” events can happen. The time to plan for those events is ahead of the crisis.

Imagine the scenario: It is August 2017. As the CEO of a toy manufacturing company, your firm is coming up on the biggest, most lucrative season of the year – the December holidays. Irrespective of tradition, the bringer of gifts will need some 21st century manufacturing support — your toy company is just the one for the job!

Knowing the retail toy sector is largely seasonal, your company team understands the traditionally longer manufacturing lead times needed to stock store shelves. They have worked hard, marketed and won contracts from the major toy retailers in advance of the big season. Your company also anticipated the early holiday shoppers and made sure products will be delivered by the middle of September. It is this holiday-season Accounts Receivable that will fund your firm’s working capital throughout a good portion of next year.

Now ask the question: Do you need trade credit insurance on those Accounts Receivable? Is it a luxury or a necessity? There is market concentration with a historically large buyer that could not possibly file for bankruptcy right before the holiday season, the best time of the year. You decide to gamble with that thought in mind.

Your CFO, however, has been reading the trade press on the difficulties facing the retail sector, as the major box stores wither under cost competition from online retailers. She recommends you take a look at insuring buyer risk, just in case retailing has indeed crossed a Rubicon and become an online enterprise. The is not really the news you want to hear going into the busiest season of the year — but then again, you made her CFO because she is willing to bring you the hard news. With a quick call to your broker, you are able to line up a trade credit solution covering the risk concentration associated with a large buyer. As it turns out, this one call can be the move that saves your toy company. Unlike many of your competitors, you will now get paid for the shipped merchandise.

When everything is going well, accounts receivable are being paid and aging accounts are small, trade credit insurance might look like a luxury. However, it is also a good time to review your options and risks with an experienced trade credit insurance expert at Securitas Global. The premium rates can be lower with greater underwriting capacity. Even more importantly, markets recognize the value of supporting existing clients on credits like Toys “R” Us. Just prior to the bankruptcy filing, our Securitas Global team heard comments from vendors with respect to getting trade credit insurance on Toys-R-Us that included: “It’s expensive” and “We’re concerned, but we don’t think they’ll file yet.” When it became clear there would be a loss, and insurance was no longer available since underwriters will not insure a certain loss, the cost of protection became secondary. The conversation became one of whether any available coverage options existed.

The moral of the story: The time to put trade credit insurance in place is before there is a known risk. As one client shared “I have too much invested in my business to risk it because one of my customers can’t pay me.” Securitas Global can develop a customized solution to cover your needs at the right price point. We work with clients to determine their level of risk and how to allocate it then devise a policy that will cover their specific needs. This can include coverage for overseas buyers and ways to mitigate political risk. By insuring accounts receivable, we are able to preserve your firm’s working capital and support credit access.

Pamela M. Bates Joins Securitas

Pamela M. Bates Joins Securitas

PB

Securitas Global Risk Solutions is delighted to announce that Pamela Bates has joined our team to provide customized solutions to mitigate credit and investment risk in global markets.  Pamela will be based in Virginia, where, in addition to risk mitigation, she will provide strategic and policy advice to assist our clients in navigating international business opportunities.  Working for the U.S. Department of State for over two decades as a foreign service officer, Pamela managed U.S. diplomatic efforts on energy, information technology and government procurement issues.   In addition, she earned an MBA from the Wharton School.  Pamela brings the skills, knowledge and network to support our clients’ international expansion goals.

International markets provide outstanding opportunities for U.S. exporters to diversify their customer base.  Securitas provides risk mitigation strategies to help reduce the uncertainty associated with approaching new markets.  Pamela will concentrate on solutions ranging from mitigating private sector credit risk, sovereign contract frustration risk, financing international trade, protecting equity investments against political risk, along with government relations strategies, to bring products to global markets.

Having previously lived and worked in France, Germany, Switzerland, and Brazil, Pamela has an extensive network of contacts around the world. She speaks Spanish, Portuguese, and French, along with English.  While a State Department employee, she taught classes on diplomatic tradecraft, including how to evaluate sources of risk.  In addition to her MBA, Pamela earned a Bachelor’s degree in Economics and Environmental Studies from Bowdoin College in Maine and a Master’s degree in International Affairs from the Johns Hopkins University, School of Advanced International Studies.

Thank you for welcoming Pamela to Securitas team.