Effective and Innovative Uses of Credit InsurancePresentation Transcript
Effective and Innovative Uses of Credit Insurance GROTTO Workshop July 8 th - 9 th 2009 Charleston SC Jesse R. Speltz Atradius Trade Credit Insurance If you can read this, your settings are not optimal for printing this presentation and will draw certain graphics incorrectly. Please re-print using the “Color” setting, even if printing using a black & white printer.
Economic conditions deteriorated very seriously in the fourth quarter of 2008
The global financial system is very fragile
Stock markets are facing downward pressure and credit spreads remain elevated
The capacity for fiscal stimulus is narrowing
Expectation of deep recession translated into a significantly worsened insolvency environment for the entire global corporate pool
When will it all end and recovery take place?
The Global Economy has Entered Into Recession…(worse news)
Recession – What’s The Overall Impact
2009 and Beyond
Expected default in Western Europe and USA
Risks Faced by Credit Managers
Risks Faced by Credit Managers Slow payment/default Bankruptcy Contract repudiation Contract dispute Abusive bond drawing Financing risk Contract risk Commercial risk Foreign exchange control legislation Discharge of debt legislation Government repudiation of debt Payment moratorium Insurrection/overthrow/domestic turmoil Non-payment due to war Non-payment due to natural disasters Country risk Political risk Currency fluctuation/devaluation FX risk Currency inconvertibility Transfer/economic risk
Choosing Credit/Payment Terms
The spectrum of credit/payment terms
Extended terms, installment notes
Open account, clean drafts
Time draft (D/A)
Consignment/retention of title
Sight draft (D/P, C.A.D.)
Cash against goods, C.O.D.
Advised letter of credit: sight & time
Confirmed letter of credit
Cash in advance
Using Credit Insurance
Trade credit insurance protects a company’s commercial accounts receivable from unexpected and catastrophic losses resulting from insolvency or "non/slow-payment" by its buyers and from political events that obstruct payment.
Like all insurance, credit insurance involves risk sharing rather than 100% risk lay-off (like an exporter gets with a letter of credit or avalized draft).
What Is Trade Credit Insurance?
The Only Major Asset Left Uninsured Most companies insure against every other unpredictable event that has a high potential for loss; property, liability, business interruption ect………however have no insurance against excessive credit write-offs .
Insolvency (Chapter 7, 11)
Protracted default (non-payment within 6 months of due-date)
DISPUTES are not covered!
Transfer Risk - political/economic events preventing or delaying transfer of payments
Government Moratorium/Exchange Controls/Discharge of Debt - government legislation preventing release of funds or absolving buyer’s payment obligations
Contract Frustration - government action preventing performance of the contract
Civil Turmoil - insurrection, war, natural disaster
Two Basic Types of Coverage Offered Typically 80% - 90% of invoice value is covered by trade credit insurance
Risks Faced by Exporters Slow payment/default Bankruptcy Contract repudiation Abusive bond drawing Financing risk Contract risk Commercial risk Foreign exchange control legislation Discharge of debt legislation Government repudiation of debt Payment moratorium Insurrection/overthrow/domestic turmoil Non-payment due to war Non-payment due to natural disasters Country risk Political risk Contract dispute FX risk Currency fluctuation/devaluation Currency inconvertibility Transfer/economic risk
Comparison of Risk Mitigation Techniques [see handout for footnotes]
Risk Mitigation Techniques (Footnotes) 1. It may be possible for the applicant to obtain a court injunction to stop payment of a non-negotiable L/C. 2. Preferential payment risk exists unless the standby is properly worded. 3. Country risks are covered if the L/C is confirmed by a “developed-world” bank. 4. Country risks are covered if the guarantee is a ‘local guarantee’. 5. If the principal repudiates the contract, the guarantor may do the same. 6. Contract repudiation insurance is available as separate coverage. 7. A receivable in a foreign currency made be sold, including the remaining currency fluctuation risk. 8. FX exposure depends on the currency of the credit.
Any company that sells to other businesses on short-term credit terms
Manufacturers, wholesalers, distributors, service providers with annual domestic or export sales of at least $5 million.
Companies that would like a second set of eyes and ears to monitor their buyers.
Businesses seeking protection during these very difficult economic times should a catasophic bad debt happen.
Who can benefit from Credit Insurance?
The insurer approves credit limits on the insured’s (largest) buyers based on the maximum outstanding amount anticipated during the life of the policy.
“ European-style” insurance involves the insurer individually underwriting and accepting the risks of each buyer
Named-buyer coverage normally allows the insurer to reduce or cancel credit limits upon notifying the insured of deteriorating credit conditions (“cancelable coverage”)
Non-cancelable coverage carries additional conditions to make certain the insured continues to make prudent credit decisions
Discretionary Credit Limits (DCLs)
“ American-style” insurance provides the insured with a DCL so the insured can automatically offer credit terms up to a pre-set maximum limit amount for smaller buyers
A DCL will be accompanied by an annual deductible and other conditions on its use
Principles of Credit Insurance The designations are historical: Nowadays, European insurers offer “American-style” insurance and American companies offer “European-style” insurance
Good credit management practices must be in place before a policy is bound.
Routine bad-debt protection.
Credit insurance is not designed to protect against normal bad-debt losses. Instead, it protects against the unforeseen and excessive bad-debt losses which can be financially devastating.
Different than Factoring
Trade Dispute Protection – is not covered
What Credit Insurance Isn’t
Benefits of Trade Credit Insurance
Protect your company against catastrophic events
Enhance credit management
Protect Your Balance Sheet!
If you are like most companies, 80% of your business comes from 20% of your customers. Imagine the impact on your company if one of your best customers were to stop paying you.
Manage your bad debt reserve and write-offs with greater certainty.
Take excess bad debt reserves back into income.
Improve your cash-flow; no big surprises!
Improve Sarbanes-Oxley compliance!
Credit insurance can give you peace of mind!
Enhance Your Credit Management!
Receive unbiased, third-party credit opinions on your customers.
Reduce your credit investigation costs and ensure sound Credit Management procedures.
Accurately budget and forecast your premium costs and bad debt write-offs.
… and premiums are tax deductible!
Improve Your Financing!
If you have a few large customers or do a lot of exporting, you are viewed by banks as a bad credit risk ! Having credit insurance improves your own creditworthiness.
Reduce concentration risk
Increase the pool of “eligible” receivables, often including foreign receivables
Increase advance rates
Reduce interest rates
Strengthen client relationships - you can offer better financing terms backed by the knowledge you can obtain funding
Some banks will purchase insured receivables, enabling programs where you can offer customers financing that will actually be carried by your bank.
If you are securitizing your receivables, credit insurance can be used to overcome concentration limits and to make foreign receivables “eligible.”
When financing insured receivables, it is important to remember these key points:
The policy will specify retention in the form of coinsurance, deductibles or both for each transaction to be insured. The bank will take this retention into account when calculating the borrowing base of eligible receivables.
For example, if the Insured has coinsurance of 15% on a covered receivable in the amount of $100,000, our maximum claim for this buyer is $85,000 (85% of $100,000). The bank will count 85% of the invoice value as eligible in this case in order to assure themselves of a full recovery of the principal amount if a valid claim against the policy arises.
The bank will subtract the full amount of any deductible from the borrowing base.
Although they may be used as loan collateral, it is not feasible to sell receivables covered by a policy with a deductible.
Lenders are often concerned about the additional conditions that accompany discretionary limits.
Financing Insured Receivables
It is common for Atradius to write policies with no deductibles and no discretionary limits.
This tends to comfort lenders and facilitate financing.
When a bank uses insured receivables as collateral, the bank can be named as a Loss Payee under the policy.
We issue an endorsement naming the bank as Loss Payee for all proceeds paid under the policy. The bank may be the sole payee or joint with the Insured.
This endorsement gives the bank an assignment of all rights under the policy in the event the Insured defaults on their loan and the bank forecloses on the receivables.
This endorsement cannot be changed without written consent from the named bank.
When a bank purchases insured receivables, the bank can be named as a Loss Payee or as a Joint Insured under the policy.
We attach a Trade Finance Endorsement that recognizes the bank as owner of the receivables and a Joint Insured .
This endorsement gives the bank the right to take over management the policy at any time.
The bank shares the obligations of the Insured such as payment of premiums, reporting of sales and past dues, etc.
No terms of the policy except buyer credit limits may be changed without consent of the bank.
Loss Payee vs. Joint Insured
Increase Your Sales!
Credit insurance enables you to sell more goods/services on longer credit terms while substantially reducing the overall risk of exposure to non-payment from your buyers.
Credit insurance allows you to offer open account terms; a more competitive alternative to requiring customers to obtain letters of credit.
Credit insurance assists you with entry into new markets.
As sales increase, you are better able to finance your increasing receivables
Importer in Brazil is paying 20% per annum to borrow locally, in reals
The importer is currently paying you net 30, but wants 180 days for a US$50,000 purchase
The importer is willing to pay 12% p.a. and sign a draft to get such terms
The sale can be insured for 1% flat (effectively 2% p.a.)
A bank is willing to buy the insured draft or note at a discount to yield LIBOR + 1.5% (about 6.9% p.a.)
A Simple Example $50,000.00 + 3,000.00 - 530.00 - 1,828.50 $50,641.50
The importer gets financing at a rate below what he would pay locally.
The insurer takes 90% of the risk (a net reduction to the exporter).
The bank buys the receivable immediately (not 30 days later).
And the exporter makes an extra $641.50 (and gets a DSO of zero).
Do the math
General information on the policy;
Credit limit administration
Communication of recent activities or events.
Past due reporting
Atradius´s on-line information system supports our customers in all their policy administration activities such as: [email_address] on-line information system
When using credit insurance, it is important to remember these key points:
Insurance does not cover disputed invoices
Disputes between the Insured and Buyer must be settled in the Insured’s favor to maintain coverage under the policy
Sales reporting must be completed within the time specified in the policy (usually 15 days after the end of each quarter).
All accounts that reach 60 days past due must be reported to Atradius within 20 days from the expiration of the Maximum Extension Period.
Claims must be filed with Atradius no later than 180 days from the expiration of the Maximum Extension Period. If filed after that date, no payment will be made under the policy.
If a covered buyer on the policy is more than 60 days past due, new shipments will not be covered by the policy unless the past due invoices are cleared.
Key Policy Points (might Remove)
Atradius Facts & Figures
31% Global market share
Rated ‘A‘ by Standard & Poor‘s and A2 by Moody‘s
Professional competence with more than 75 years of experience and knowledge
Trade transactions worth over $588 billion covered annually
Access to information on 52 million companies worldwide
22,000 credit limit decisions daily
Annual income of $1.9 billion
More than 160 offices in more than 40 countries
Staff of approximately 3,600 professionals worldwide
Headquartered in Amsterdam, The Netherlands
US Headquarters in Baltimore, Maryland
The Atradius Global Network * Risk underwriting centers North America Canada* USA* Mexico* South America Netherlands Antilles Chile Europe Austria Luxembourg Belgium* The Netherlands* Czech Republic Norway* Denmark* Poland* Finland* Portugal France* Russia Germany* Slovakia Greece Spain* Hungary Sweden* Iceland Switzerland Ireland* United Kingdom* Italy Oceania Australia* New Zealand* Asia China Hong Kong India Japan Africa Kenya South Africa Tunisia Middle East Israel Lebanon United Arab Emirates
Grupo CyC - 64.2% Grupo Companía Española de Crédito y Caución, S.L., Madrid ( Spain) The most important shareholder of which is Grupo Catalana Occidente, S.A.
Swiss Re – 25% Schweizerische Rückversicherungs-Gesellschaft, Zurich ( Switzerland)
Deutsche Bank – 9.1% DB Equity S.a.r.l. a subsidiary of Deutsche Bank AG, Frankfurt ( Germany)
Sal. Oppenheim – 1.7% Betrados B.V., a subsidiary of Sal. Oppenheim jr. & Cie. KGaA, Cologne ( Germany)
Atradius Modula Policy
The Atradius Modula policy is a revolutionary concept in credit insurance that allows you to build a policy that is customized to meet our clients specific risk mitigation requirements.
Atradius Modula provides:
A flexible, tailored approach to commercial credit insurance
Access to an global debt collection service
First-class policy management system (Serv@Net)
First class account management support
Flexible coverage based on a series of "building blocks", which means you get the coverage you need to match your business requirements
Clear and transparent pricing that allows you to budget for your coverage effectively
Access to our integrated collections service as part of the policy
The Atradius Advantage
Proven track record of 75 years experience in the global credit management industry
90 offices located strategically around the globe in 40 countries
Guaranteed individual, professional support through 3,600 professionals worldwide
Fully integrated network and product offerings ensure the best possible credit management solutions
Database of information on 45 million companies worldwide provides accurate and timely information on potential trade partners
Capability to help you stay ahead of competition by assessing credit risk in emerging markets with high growth potential
[email_address] online policy management system provides quick and easy access to policy, claim and credit information
No Restrictions on US Content
Full Suite of Special Products – Single Buyer Policy, CEN Policies, Contract Frustration, Unfair Calling of Bonds
The world leader in credit insurance and receivables management Jesse R. Speltz Regional Vice President Southeast Region Phone: 770-641-9331 Fax: 770-641-9338 Mobile: 404-353-5651 Email: email@example.com