Welcome to this week’s Baker Ing Bulletin, where high-brow finance meets debt collection savvy.

Buckle up, we’re on a wild ride; from the complex tangle of Taeyoung Engineering’s debt restructuring to the rollercoaster of oil prices post-military strikes, every story is crossroads for trade credit.

So, let’s unwrap these January gems…

Global trade is facing a significant challenge. The CEO of Maersk, Vincent Clerc, has publicly warned of prolonged disruptions in the Red Sea, caused by Yemen’s Houthi rebels’ attacks, predicting that the crisis could last for months. This stark warning has crucial implications for trade credit, highlighting the need for strategic adaptation in the face of extended supply chain disruptions.

Clerc’s forecast being a long-term is particularly alarming. Extended disruptions mean prolonged delays in shipping times, as vessels are rerouted around the Cape of Good Hope. This not only impacts delivery schedules but also severely strains trade credit arrangements globally. Companies relying on the timely arrival of goods for production and sales are now forced to reevaluate their payment terms and credit strategies, dealing with the ripple effects of these logistical setbacks.

The prospect of a months-long disruption is prompting a reassessment of credit risk and liquidity needs across various sectors. Credit managers are finding themselves in a position where they must extend payment terms and/or increase collections efforts to account for these delays. This situation is compounded by the surge in cargo prices, adding further pressure on businesses already navigating tight margins and challenging market conditions.

For credit professionals, this prolonged crisis calls for a heightened focus on risk management and client support. There is an increased need to closely monitor clients’ financial health, particularly those heavily reliant on goods passing through the Red Sea. The situation demands not only a reevaluation of existing credit policies but also a proactive approach in offering flexible solutions to clients affected by the prolonged disruptions, as well as ramping up the sophistication of collections.

Vincent Clerc’s warning serves as a critical indicator for trade credit. The extended duration of the Red Sea disruptions requires us to be vigilant and adaptable now to the evolving needs of our clients. Staying informed and prepared will be key in navigating the complexities and challenges posed by this ongoing maritime crisis.

Following recent U.S.-U.K military strikes on Yemen’s Houthi rebels, trade credit is now grappling with another critical development – a significant surge in oil prices. This increase, recorded on January 11th 2024, with Brent and West Texas Intermediate futures climbing sharply, comes in the context of the already disrupted shipping routes in the Red Sea covered earlier. This combination of events presents a compounded set of challenges for credit.

The situation demands a refined analysis and a proactive response. The direct impact is increased cost of fuel, affecting the operational expenses of businesses across a range of sectors. This rise in costs will likely lead to tighter cash flows and necessitate a reevaluation of credit terms and conditions for affected businesses.

Moreover, given the context of disrupted shipping routes in the Red Sea, the oil price surge exacerbates the existing challenges. Companies are already facing extended delivery times and supply chain uncertainties due to the rerouting of ships. The additional burden of rising fuel costs adds another layer of complexity to managing trade credit risks….Its a burden which will be too heavy for some.

We must consider both these aspects. One the one hand, it will require strategies for managing increased operational costs, such as exploring alternative logistics solutions or renegotiating supplier contracts. On the other hand, there may be a need for increased flexibility in credit arrangements to accommodate the compounded impact on businesses’ cash flows and financial stability, as well as more robust collections activity.

In response to this double whammy of middle east developments, credit professionals should take specific, targeted actions. Key sectors like manufacturing, logistics, and retail, which are heavily reliant on fuel and efficient shipping, are most at risk and need immediate attention. Credit managers should consider reassessing credit limits and payment terms for clients in these sectors, potentially extending payment deadlines to accommodate for increased operational costs and delayed shipments, whilst shoring-up receivables collection capabilities. We must also advise clients to explore more cost-effective shipping routes or alternative suppliers to mitigate supply chain disruptions. Additionally, implementing more rigorous credit monitoring and risk assessment procedures for these vulnerable sectors will be crucial.

The recent announcement by Taeyoung Engineering & Construction to undergo debt restructuring with the Korea Development Bank has raised significant concerns in the sector. This move by the mid-sized South Korean builder is not just another restructuring case; it mirrors the preceding events leading up to financial shockwaves in 2022 when the default of a Legoland theme park developer led to significant turmoil. That default led to a spike in corporate borrowing costs and a liquidity crunch, exemplifying how the failure of a single high-profile project can have widespread repercussions on the broader credit market.

Taeyoung’s decision is particularly alarming due to its possible domino effect within the vulnerable construction sector, which is highly sensitive to economic fluctuations. The company’s financial troubles, marked by a dramatic 15% drop in its share value, reflect not only on its own stability but also point to underlying vulnerabilities within the entire sector. This scenario is worrisome for trade credit, as it could mark the beginning of a series of financial difficulties for other companies in construction.

The sector’s importance to global trade and commerce can’t be overstated, and it is often heavily reliant on trade credit. A significant entity like Taeyoung struggling financially raises red flags about the sector’s health and its capability to fulfill financial commitments.

For credit professionals, Taeyoung’s restructuring necessitates a reassessment of risk, particularly within the construction sector. The potential for increased defaults and payment delays is real and could significantly affect the stability of trade credit. Time to review and possibly recalibrate risk models, considering the heightened uncertainty. More conservative credit terms and enhanced risk management practices are likely.

The Financial Conduct Authority (FCA) in the UK has announced a thorough investigation into the motor finance industry, a move that holds significant implications for credit. This scrutiny, sparked by rising consumer tensions over commission arrangements, is set to impact the financial stability of companies within this sector, making a deep understanding of these developments essential for evaluating creditworthiness and potential risks.

The FCA’s focus stems from a ban implemented in 2021, prohibiting incentives for brokers that led customers to pay higher interest rates for motor finance. Despite this ban, numerous customer complaints have surfaced, alleging unfair commission arrangements before the prohibition. In response, most motor finance companies have rejected these complaints, asserting compliance with the legal and regulatory standards of the time.

The investigation is poised to significantly impact the entire automotive industry. This probe may lead to tighter financing options as financing firms fall to cost pressures stemming from FCA action, directly affecting car sales and the financial health of manufacturers and dealerships. The potential financial strain on motor finance companies could result in a broad recalibration of credit terms and availability, which would in turn ripple through the automotive supply chain.

As a response, credit professionals should consider conducting a comprehensive reassessment of credit risks within the UK automotive sector. This includes evaluating clients’ exposure to these financial shifts and their capacity to withstand tightened financing conditions. The potential for reduced sales and increased financial strain calls for a meticulous review of clients’ financial stability and resilience.

Staying ahead of FCA’s findings is crucial. This means not only closely monitoring the developments but also proactively adjusting credit and collections models, as well as terms, to reflect the changing risk landscape. Trade credit providers might consider more conservative credit limits and enhanced due diligence for clients within the automotive sector, particularly those heavily reliant on motor finance avenues.

Moreover, this situation demands we engage in proactive dialogue with clients, advising them on diversifying their financing options and preparing for potential sales downturns. This could involve exploring alternative credit facilities or restructuring existing debts to mitigate the impact of tightened financing.

The FCA’s investigation into the motor finance sector requires a sophisticated and dynamic approach from credit professionals. It is essential to balance vigilance with strategic flexibility, preparing for different outcomes of the investigation. The key is to anticipate market shifts, adapt credit policies accordingly, and actively support clients in navigating through these challenges, thereby safeguarding the interests of both parties in a rapidly evolving space.

In a move that’s buzzing through the corridors of credit and beyond, Baker Ing is rolling out the red carpet for ‘Credit Frontier 2024’ on Thursday January 25th. This webinar is billed as the convergence of high-flying economic intellect and savvy credit tactics.

At the heart of this event is Markus Kuger, Baker Ing’s Chief Economic Advisor. Kuger, a maestro of economic trends, is set to dish out insights on the EU’s economy and global financial currents. His session is tipped to be vital for attendees keen to decode the complex economic puzzle of 2024.

Then Shaun Rees, known for turning economic forecasts into no-nonsense, practical strategies, will transform theoretical knowledge into solid, actionable plans for Credit Managers. Expect tips and tricks that could make the difference between thriving and merely surviving in 2024’s credit landscape.

What really sets ‘Credit Frontier 2024’ apart is its extended Q&A. Here’s where the rubber meets the road – an unscripted, anything-goes opportunity for attendees to pick the brains of the speakers. Its a front-row seat to a brainstorming session with some of the sharpest minds in the business.

Post-event, attendees will be treated to exclusive, detailed reports from Kuger and Rees, accessible from the Global Outlook section of Baker Ing’s website; your credit playbook for the year.

Registration is now open for this high-octane, insight-packed event. ‘Credit Frontier 2024’. Set your reminders – this is one lunchtime session that could redefine your credit strategy playbook for 2024: https://bakering.global/webinar.

As this week’s Baker Ing Bulletin draws to a close, let’s stride confidently into the rest of 2024. This year is already unfolding with opportunities and challenges, each requiring a blend of keen insight and bold action.

With that in mind, for all the sharp-eyed analysts and the fearless decision-makers out there, don’t forget that Global Outlook is your go-to resource for cutting through the complexity of credit narratives. Stay ahead of the curve by visiting: https://bakering.global/global-outlook/

We’ll see you next week for another cocktail of credit challenges and opportunities..