Market Monitor - Construction industry - United States

United States

• Growth continues in 2015
• Payments take between 30-60 days on average
• Smaller buisnesses generally pay later

In 2014 the US construction sector continued its rebound that started in 2012, with increases in both employment and reported billings. According to the Dodge Construction Outlook total construction starts increased 4% in 2014, and a 9% increase is forecast for 2015, while the vast majority of construction and design firm executives believe the market is stable or growing.

Due to the positive development we have steadily increased our cover for this industry over the past few years. However, it must be said that the construction market rebound still lags behind the overall economic recovery that began in 2009.

In early 2014 adverse weather conditions triggered a rocky start for construction and the US economy, affecting job growth, homebuilding, manufacturing and spending. That said, in the course of the year consumer confidence grew, job creation resumed, and GDP increased as the year progressed, to 2.2% in 2014.

In the residential construction subsector home prices increased in 2014, although not as sharply as they did in 2012 and 2013. In 2014 foreclosures decreased 30% year-on-year. First-time buyers benefitted from a decrease in investors buying single-family homes, which created less competition for lower-priced inventory, although strict credit standards led to fewer than expected first-time buyers. New-home starts only marginally increased in 2014. Mortgage rates decreased below 4% by the end of 2014 and the inventory of property for sale is growing, which is leading to rising home values. It is estimated that mortgage rates will settle between 4%-6% in the mid-term, beginning around mid-2015. However this increase is not predicted to have a major impact on home sales. The 2015 Dodge Construction Outlook forecasts an 11% increase in single-family housing units and a 7% increase in multi-housing starts.

Commercial building output increased 14% in 2014, and is estimated to increase at roughly the same pace in the coming year. 2014, like in 2013, saw massive growth in manufacturing plant construction due to the start of chemicals and energy related projects. Last year there was a moderate upward trend in institutional building which is expected to continue through 2015, aided by financing available for K-12 school construction. Healthcare facilities showed diminished activity in 2014, though that is expected to improve. After a 9% decline in 2014 public works is expected to rebound by about 5% in 2015, mainly due to highway and bridge construction.

Payments in the US construction industry still take 30-60 days on average, while 90 day terms are not uncommon. While the overall number and value of the notifications of late payments we received in 2014 has increased, this was primarily due to a solid increase in our exposure to the sector. It is also partially a function of the industry with payments coming from the general contractor to sub-contractors and then in some cases to the underlying supplier. If one company in the chain does not pay, rarely will the others.

Despite the rebound in recent years the downward pressure on revenue has not significantly changed since the 2008/2009 downturn. Additionally increasing salaries, healthcare costs for staff and miscellaneous expenses continue to tighten margins. At the same time tougher credit standards have required higher equity from construction businesses. Banks are principally willing to lend to the construction industry, but only for viable and promising projects. However, as the commercial and residential development markets strengthen, the construction sector´s financing climate is improving. Given the positive growth prospects for the industry, we expect notifications of late payments to level off in 2015. Construction firms hope to increase bid prices in 2015, which are driven by material costs, which are also expected to increase. In 2013, approximately 60% of construction firms were in “very good” or “good” financial health, up from 50% in 2012. This further increased to 66% in 2014.

Construction insolvencies have continued to improve overall in the US last year. However, small businesses in the industry are generally still paying later and have higher bankruptcy rates and delinquent debt than other industries (construction sector small business national average bankruptcy rate was 2.3% in 2014). But the decreasing trend is expected to continue throughout 2015.

In summary, we assess buyers in this sector in this way:

• Cover will be considered if we can see evidence of favourable trade history, financial statements, or other credit/financial insight.
• Reduction or withdrawal of cover is considered if the buyer shows significantly worsening results, including losses, heavy debt levels, problems with working capital, cash flow or liquidity, or deteriorating payment trends.
• Where financial information is required, we will look for signs of progressive and profitable operations, positive working capital and cash flow, and satisfactory debt to net worth leverage. We also take into account less measureable aspects such as goodwill, health/pension liabilities, and litigation issues.
• We consider whether other forms of risk mitigation – such as Uniform Commercial Code (UCC) filings, letters of credit, increased co-insurance and decreased indemnification, and shortened terms of sale – will assist us in agreeing to cover.