CM December DECEMBER 2018

Fallen angels in the making
FIRMS need to watch out for rising interest
rates and inflation. Hikes in interest rates
haven't hurt consumers or corporates yet,
but they will, eventually, put increasing
numbers of companies under pressure.
The damage won't be evenly distributed.
Bond Vigilantes blog identifies some
interesting wrinkles in the ways some
highly indebted companies might be
affected; for instance, some companies
have issued non-investment-grade
bonds with covenants that won't let
them pay dividends unless they have
below a specified leverage ratio, or above
a certain level of interest cover. Quite a
few shareholders run the risk of a major
disappointment in their high-yield
portfolios. Now, you may think that this
is only of interest to finance enthusiasts,
a sector of the population I'll reluctantly
admit I belong to. But actually, there is a
lesson for all credit control departments,
which is not just to rely on the headline
financial information when you're
assessing customers' ability to pay. Do your
research, attach the notes to the accounts,
and make sure you know exactly where you
rank for your pay-out if the worst happens.
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East Africa – booming but risky
EAST African countries are seeing great
GDP growth at the moment; Ethiopia's
growing by eight percent, Kenya by six
percent, and all the East African countries
scoring above the average for sub-Saharan
Africa. Infrastructure development has
been fast and is improving the prospects
for business – once you get reliable 24-hour
electricity, it transforms manufacturing
business's ability to compete – and the
lives of citizens.
But that infrastructure comes at a high
cost; public deficits have been going up all
over the region, and according to Credendo,
what makes matters worse is that these
deficits have been funded by external
RUSSIAN RESILIENCE
IF you were asked for a great export prospect, Russia might not be your first thought –
but it’s not looking that bad. True, expected growth is rather modest at 1.5 percent, and
there’s a high level of business insolvencies, but the country is managing to do reasonably
well despite sanctions. Exports have been diversified, and the manufacturing sector has
strengthened. Russia has also kept an even keel with relatively prudent management of
government finances. Improving oil prices should help this commodity rich country, too.
So far, so good.
debt (though Ethiopia and Tanzania have
managed to attract significant foreign
investment, which reduces their exposure).
Many of the components have to be
imported – there is no local semiconductor
or telecoms manufacturing industry, for
example. And while eventually the export
sector should grow, right now most of
these countries are limited to commodity,
primary exports.
So, there's great potential in these
markets, but also big risks, particularly
in the government sector. Moody's
downgraded Kenya's credit rating earlier
this year, and has Tanzania on a negative
outlook, so mind how you go.
FROM THE FENS
TO THE PAMPAS
ELGOODS brew some great beers in the middle
of the Fens, which most people will tell you
is pretty much the middle of nowhere. Until
2015, they didn't export. Now, they export
to ten countries, have been on four trade
missions, and are just starting to export to
Argentina, which they expect will double their
international sales. Their next target? Japan.
That's a great success story. But it's
interesting that their biggest problem has
been finding reliable buyers. Not marketing,
not changing the product, or labelling, but
just finding the right partners abroad. Never
forget, when you’re running the slide rule over
customer credit, you're dealing with the future
of your business.
DO YOU NEED
A TONIC?
UK gin manufacturers sold £1.6 billion
worth of gin in the year to June 2018, and
£532 million of that was exported. British
gin is on a roll right now with a surge of
popularity helping everyone from the biggest
manufacturers to tiny artisan start-ups.
One big lesson from this? Clustering. Once
an industry starts making a name for itself
in export, it’s that much easier for the next
exporter to get into the market. We’ve done it
in gin – can we do it in other sectors too?
Global geography reappraised
SOMETIMES we trust statistics too much,
particularly when it comes to average. For
instance, do you know anyone who actually
earns the average UK salary?
That's why I liked Euler Hermes' latest
analysis of global corporate debt. Average
net gearing across the world is 53 percent –
but that's about as useful as knowing global
average rainfall or average temperatures. If
you're in South Africa, you will get higher
temperatures – but also the world's least
indebted corporates, with only 38 percent
gearing. (Poland and Australia come close
with 43 percent and 41 percent respectively.)
Alternatively, if you're looking for trouble
to steer clear of, Southern Europe looks like
a hotspot of debt. Portugal has an impressive
96 percent average leverage, with Greece at
68 percent and Spain at 69 percent. Turkey,
at 72 percent, doesn't look as exposed as
Portugal until you think about its high
budget deficit and the rising oil price.
The same goes for sectors – some are
horribly indebted, others not. Paper, transport
and textile sectors are the chief trouble
spots, but there is some good news in store
– energy and metals companies are actually
improving, though still with fairly high debt
levels. Of course, these are still only averages.
Even if you're exporting within a highly
indebted sector and to a highly indebted
country, you can at least choose the most
credit-worthy customers and beat the odds.
The Recognised Standard / www.cicm.com / December 2018 / PAGE 29