The recovery continues in United States

The Expected Default Frequency in the US has dropped to 1,3%, but smaller businesses are still finding it a challenge to secure or maintain financing  at least on terms that are competitive.
Analisis Credito y Caución
Madrid - 31-mai-2010

In Q1 of 2010, the US economy expanded at a rate of 3.2% year-on-year and 2.5% on the previous quarter. While this represents a slower rate of growth than in Q4 of 2009, and was perhaps slightly weaker than many expected, it nonetheless provides further evidence that a sustainable economic recovery is taking hold.

Consumer spending, an element that usually represents about 70% of U.S. economic activity added almost 2.6% to GDP its biggest contribution since Q4 of 2006. Business inventories increased by US-$ 31.1 billion in Q1 of 2010 the first increase since Q1 of 2008. Another jey driver was businesses  invest capital in software and equipment.

While these are certainly very positive indicators, growth was somewhat inhibited especially by the deterioration in construction. This proved to be a drag on growth in the first quarter of 2010. Residential investment contracted at a rate of 10.9%, despite tax incentives for home purchasers. Also, business spending on property structures declined 14% year-on-year in Q1 of 2010 and export growth slowed sharply while imports rose.

Commercial Lending Standards

While there is some stabilisation in terms of lending standards, smaller businesses are still finding it a challenge to secure or maintain financing at least on terms that are competitive. This continues to place small firms in a difficult position as they seek to finance their climb out of the recession and capitalize on the opportunities of recovery.

Based on data compiled by Automated Access to Court Electronic Records [AACER], Chapter 11 filings for companies seeking to reorganize or liquidate totalled just over 1,200 in April 2010. Through the end of April 2010, and assuming a simple run-rate basis, there will be only 3% fewer Chapter 11 cases filed than in 2009, the midst of recession. Including Chapter 11 liquidations, business bankruptcy filings reached just over 29,000 in the first four months of 2010. States with the largest increases in average monthly filings over the last year include Hawaii, California, Virginia and Vermont. Florida, though reporting a slight improvement in 2010, still shows historically high levels.

In March 2010, the Expected Default Frequency [EDF] in the US again dropped compared to the previous month by 15 basis points, to 1,3%. Between January and March 2010 it declined by 32 basis points.

Steady but fragile rebound of domestic consumption

Positive signs of recovery are definitely appearing. However, the rate of recovery is something that Crédito y Caución will monitor with interest. Consumers drive US GDP and, while there are signs of stabilising unemployment levels, consumer sentiment remains fragile. Still high unemployment rates, increasing consumer credit card burdens and eradication of a savings safety-net for many families continue to temper the growth of consumer spending. Consumer demand for bank loans is not increasing and, with home equity reduced or totally wiped out in many instances, there is not likely to be a significant upturn in consumer spending in the short-term.

While Credito y Caución believes that improvements in the contribution of consumer spending to GDP will be slow but steady in the coming months, consumer sentiment remains susceptible to their perception of possible negative economic events such as further mortgage defaults, increasing foreclosures or indeed any regression or slowdown in the improving jobless rate.

On the corporate side, and as mentioned earlier, many smaller businesses, which can often be the innovative engines of growth in a recovery, are still struggling to achieve or maintain financing to capitalise on growth opportunities, or even to fund their current business scope. In view of the still high bankruptcy expectations for 2010, Crédito y Caución expects many to fall by the wayside, irrespective of the current recovery trends and as lending attitudes and consumer appetite continue to lag behind that recovery. That said, a positive side to the story is that medium to larger businesses are seeing some stabilisation in lending standards, and Crçedito y Caución has seen at first hand some positive examples of previously challenged businesses adopting effective operating and credit management disciplines during the recession that have helped them secure new or extended financing at rates that are acceptable by todays standards.

Crédito y Caución experience of payment delinquency trends and external agency scores, together with a levelling in the number of insurance claims received, suggests a tentative improvement. Opportunities will present themselves for business growth. Central to assessing the credit risk of current or new buyers is an understanding of their liquidity - be it positive organic cash flow generation, or in the form of committed external liquidity provided at serviceable rates, with a degree of flexibility for the borrower and with manageable terms and covenants.

Where such characteristics can be clearly identified in a buyer, along with positive operational management steps to improve inventory and cost management, then the ingredients are there to forge a successful commercial relationship and for Crédito y Caución to provide committed and sustainable cover.

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