Welcome to the latest Baker Ing Bulletin, where sharp financial insights meet no-nonsense debt expertise.

We’re taking a deep dive into the week’s hottest topics – from cognac market shake-ups and Brexit border blues to the rising tide of corporate debt. It’s all about the big moves and their bigger impacts on trade credit.

So grab your tea/coffee, and let’s get stuck into this week’s headline grabbers…

The cognac industry, emblematic of luxurious excess, is now grappling with significant market shifts, particularly in the U.S. and China, triggering credit concerns for the industry, as well a ripple effect across global trade.

In the U.S., traditionally a robust market for cognac, a noticeable decline in demand is emerging, largely attributed to the African-American community, a key consumer demographic. Rising living costs and inflationary pressures have led to altered consumer spending habits. This trend indicates a potential pivot towards more affordable luxury alternatives and different types of spirits. For trade credit, being aware these shifts – both as regards cognac but extrapolating this across the luxury goods and FMCG sector generally – is crucial for a realistic assessment of debtors’ financial health and market positioning.

Concurrently, the cognac industry faces a complex situation in China. The government’s anti-dumping investigation amidst EU-China trade tensions could result in tariffs and trade barriers, adding more layers of uncertainty. This demands proactive risk management, with close monitoring of political developments and preparing for a range of outcomes. Trade credit must consider the potential impact of tariffs on client profitability and cash flow, as well as the overall stability of trade relations.

Moreover, the cognac industry, known for its long-term planning, must adapt to rapid global market changes. This calls for a flexible approach to credit management, where adapting to short-term market fluctuations is as crucial as maintaining long-term strategies.

The industry’s challenges highlight the interconnectedness of global supply chains. A downturn in U.S. sales affects not only cognac producers but also the broader agricultural, manufacturing, and logistics sectors. Similarly, trade tensions with China could necessitate a reconfiguration of supply routes and partnerships. This underscores the importance of a robust, responsive supply chain that can withstand market pressures. Adjacent industries, particularly within luxury goods and high-value agricultural products, can learn from these challenges. Diversifying markets and supply chains is key to mitigating risks and ensuring preparedness for unexpected shifts.

The cognac industry’s situation mirrors wider global market trends. Export-heavy industries are experiencing the impact of increasing international market fluctuations and political turbulence, emphasising the need for agile risk assessment and a balanced approach to risk and customer support.

The UK stands on the brink of a significant trade transformation as new post-Brexit import checks are set to kick in from January 31. This pivotal shift, ending a series of postponements since January 2021, introduces fresh paperwork requirements for EU businesses exporting animal and plant products to the UK, with physical inspections commencing in April. The implementation of these checks, a critical aspect of the EU-UK Trade and Cooperation Agreement, has sent ripples of concern across industries, from food importers to horticultural suppliers.

At the heart of these changes, credit professionals find themselves navigating a new landscape of risk. The looming checks are not just a procedural shift but a potential disruptor for businesses heavily reliant on smooth imports. For sectors like food retail and agriculture, timely and efficient importation is the lifeblood of their operations. The prospect of delays and additional bureaucracy at the border poses a serious threat to cash flow and operational efficiency.

The situation is acutely felt in the food industry, where importers are bracing for potential delays at ports, which could translate into shortages on supermarket shelves and increased prices for consumers. The horticultural sector, particularly Dutch flower growers, faces a logistical challenge with the new checks falling around key commercial events like Valentine’s Day and Mother’s Day, times of peak demand and tight supply chains.

For credit managers, this demands a swift and strategic response. The potential for supply chain disruptions calls for a reevaluation of credit risks and perhaps even a restructuring of credit terms for affected businesses. There’s a need for heightened vigilance and flexibility, as clients may face unforeseen challenges in maintaining liquidity and meeting financial obligations.

The UK government remains steadfast in its commitment to these changes, promising a technologically advanced border system to streamline the process. However, for industries and credit professionals, the upcoming transition period is nonetheless worrying.

As the UK moves forward with post-Brexit trading, the impact of these border checks will be a litmus test for the resilience and adaptability of businesses and trade credit. It’s a critical moment to demonstrate our expertise in risk management, offering support and thinking innovatively to navigate through these uncharted waters of post-Brexit trade.

As the clock struck midnight on a tumultuous December, a report from Moody’s revealed a startling surge in global corporate defaults, painting a grim picture for the future of low-grade, highly leveraged businesses. With twenty companies defaulting last month, up from just four in November, the annual count soared to 159. This uptick in defaults, the highest since the economically tumultuous period following the coronavirus pandemic, sets a concerning tone for trade credit.

The surge, predominantly hitting U.S. and European companies, reflects the challenges simmering beneath the surface for borrowers with lower credit ratings. The sharp rise in interest rates, notably in the U.S., has left these companies grappling with steep funding costs. The situation is particularly dire for loan issuers with floating debt payments, now facing the squeeze of rising borrowing costs.

What stands out in Moody’s analysis is the sectors bearing the brunt of these defaults. Business services and healthcare, with 15 and 13 defaults respectively last year, find themselves in the eye of the storm. High-profile bankruptcies like Air Methods and LendingTree’s “distressed exchange” are stark reminders of the fragility in these sectors.

For credit professionals, this landscape demands a strategic recalibration. The rising default rates signal an urgent need for a more nuanced risk assessment, particularly for clients in vulnerable sectors. It’s a scenario that calls for vigilance and perhaps a more conservative approach to extending credit, especially to businesses in industries with a high proportion of floating-rate loans. Particularly vulnerable are sectors like healthcare, where such loans are common for funding expansions; real estate and construction, which depend on them for development projects; retail, with its thin margins and operational costs; and media and entertainment, including cinema chains, which often use these loans for large-scale funding.

Moody’s projection for 2024 doesn’t offer much respite. With the anticipation of more defaults, particularly in sectors tied closely to consumer spending, the task ahead for credit managers is clear. There’s a need to closely monitor the financial health of clients in these sectors, preparing for the possibility of tighter cash flows and increased credit risk.

It’s a balancing act between managing risk and supporting clients through an economic period marked by uncertainty and shifting monetary policies. Navigating this requires a blend of expertise, foresight, and agility, ensuring that risk management strategies are robust yet adaptable to the evolving economic climate.

Despite a drop in consumer inflation expectations, the ECB’s resistance to cutting interest rates anytime soon has credit professionals weighing their options carefully. It suggests that the journey back to lower interest rates might be more gradual than what the market’s hopeful eyes saw.

For credit, this is more than just central bank chatter, it’s a pivotal moment that could shape their strategies in the months ahead. The prolonged period of high interest rates, now looking more likely than before, is a critical factor for businesses across the Eurozone, especially those with debts tied to fluctuating rates. Credit professionals are now in a position where they must reassess the financial stability of their clients under these sustained conditions.

The implications are particularly stark for sectors such as real estate and healthcare, where the sensitivity to interest rate changes is often more pronounced. Here, the prospect of continued high rates could strain finances and challenge their ability to meet obligations, including those to trade credit.

This environment demands a nuanced approach from trade credit managers. We find ourselves balancing on a tightrope, needing to manage risks prudently whilst also offering support to clients navigating these turbulent times. The key is to understand the unique challenges of each sector and client, being ready to adapt credit strategies as the economic winds shift. Deep dive time – financial, operational, commercial – everything has to be considered insofar as how customers and clients will hold up under this sustained strain.

But it’s not just about managing risks; we can also seize opportunities. In this environment, by providing insights and guidance, we can help clients hedge against these interest rate uncertainties, optimise their cash flows, and steer through the economic tumult. The more deftly we can do som the greater competitive advantage we offer vs. those businesses that will employ a more blunt approach.

As the ECB continues to navigate the choppy waters of inflation and economic recovery, the message for trade credit is clear: in a world where economic certainty is a luxury, then agility, in-depth market understanding, and proactive client engagement are the tools that will help us chart a course. This period is a test of resilience and adaptability for credit.

Callisto Grand, a vanguard in credit management training, and Baker Ing, specialists in managing high-value and sensitive receivables, have announced a groundbreaking three-year strategic partnership. This collaboration aims to tackle the impact of rapidly changing global economic conditions and ongoing technological revolution within credit management.

The partnership is a direct answer to the increasing complexities credit professionals must tackle. With economic uncertainties looming large and technological advancements like AI automation reshaping the industry, there’s an urgent need for credit professionals to evolve their strategies and skillsets. This alliance brings together Callisto Grand’s cutting-edge educational methodologies and Baker Ing’s operational excellence, aiming to equip credit professionals with the necessary tools to navigate these turbulent times.

Mark Harrison, CEO of Callisto Grand, highlights the significance of this partnership, “By combining our educational expertise with Baker Ing’s operational acumen, we’re creating a holistic solution that addresses today’s volatile economic landscape.” This sentiment is echoed by Lisa Baker-Reynolds, CEO of Baker Ing, who emphasises the timeliness of this collaboration in equipping businesses with the skills and strategies vital for the new era of credit management.

For credit professionals, this alliance promises a blend of practical insights and forward-thinking approaches. It underscores a commitment to ensuring that professionals are not merely coping with today’s challenges but are also geared up to lead the charge for future innovations in credit. As this partnership unfolds, it will serve as a critical resource for those looking to stay ahead in an increasingly AI-driven and economically fluid world.

As we wrap up this week’s Baker Ing Bulletin, it’s time to roll up our sleeves for the rest of 2024. This year’s shaping up to be a cracker, packed with twists, turns, and big chances for those who dare to take them.

For all you eagle-eyed number crunchers and gutsy decision-makers, remember that Global Outlook is your ace in the hole. It’s where we cut through the financial fog and get the lowdown on what matters to credit professionals. Keep one step ahead by checking out: https://bakering.global/global-outlook/

Catch you next week for another round of credit thrills and spills…