+ Serious deterioration in 4 th QTR of 2008 – Downturn now appears to be global and the word recession has started to surface + Global financial system is very fragile – despite extensive bailouts and nationalization, the banking sector of both developed and emerging marketins continues to face sever pressure. Lending activity will continue to be difficult as the recession deepens. Stock markets are facing downward pressure and credit spreads remain elevated Large scale nationalizaton of commercial banks and extensive credit gurantees to the private sector are now weighing heavily on public finances in the US and Several European Countries. Insolvencies are expected to increase sharply across maojor markets in 2009. Emergin market corporates face similar challenges, while rising political risks add on an additional tier of uncertainty. When will it all end and recovery take place? Given the current expectations for a deep economic contraction in 2009, the downturn will probably prove to be protracted. Strong persistance in incolvency dynamics means that the corporate payment environment is likely to deteriorate even further – perhaps over several years.
The latest GDP figures make it clear that economic activity has slowed across all major markets in 2008 and the speed of deterioration was particularly fast in the last half of 08 – appears that the global economy has entered into a recession. Based on the latest numbers it doesn’t apprear that a rebound in economic activity will take place until 2010. The recovery is likely to be slow and methodical – slightly better than our friend Helen Waite.
What does it mean that we are in a recession and what are the costs? Historically speaking, if we exclude the present one, there have been 10 officially declared recessions in the United States since the end of the Second World War. They have lasted, on average, for 4.5 quarters and have varied in impact. There were two recessions that lasted for 6 quarters which was the longest on record during this period, and 2 that lasted only three quarters. If we accept that the USA has actually been in recession since the beginning of 2008 (as the National Bureau of Economic Research NBER suggests we do), then we are now going into the 7th quarter of the current recession If we look closely at the previous 10 post ware Recessions we can see that they have been heterogeneous in their impact. Some recessions GDP growth fell at the start of the recession, in others the decline in GDP growth set in earlier. In some cases output growth fell steeply during the early part of the recession and growth ceased and turned into contraction before recovery took place, while in other cases output growth slowed gradually and there was but a brier period of contraction. In several cases, output growth continued to contract after the offical end of the recessoin, though the rate of contraction continued to deminish. The worst GDP loss was in the 57-58 recession which output contract 3.7%
Okay - last slide on the current economy which I know is depressing everyone. . One of the most important factors that any business needs to know is the trend of insolvencies in their markets. This chart shows the Expected Default Frequency (EDF), and the likelihood of default across all sectors within the next year. Default is defined as a failure to make a scheduled payment, or the initiation of bankruptcy proceedings. Probability of default is calculated from three factors: market value of a company’s assets, its volatility and its current capital structure. This chart is from March – which confirmed the prediction that insolvencies would increase over all major economies in 2009. In fact the heightened default expectation has been evident since mid-2007 (see the uptick from March of 07). This chart is somewhat dated, however you can see in March 2009, the median EDF of some major Western economies rose again compared to the previous month, with a sharp increase recorded for the Netherlands. The EDFs for the US and France have decreased somewhat, but if we continue this chart out to June it would be more of a platue from March – which we were hoping to see a decrease month over month – however that has not happened yet. In fact know we are seeing increases past due reproting in the latin american contries – mexico, argentina etc. Past dues are a precursor for us of potential insolvencies.
Okay – now that we have looked at the currenet economic trends – lets look at the risks faced by credit managers
…the least risky way to sell.
6-month LIBOR was 5.4% on 2/14/07 http://www.bankrate.com/brm/ratewatch/other-indices.asp local lending rates in Mexico, Q4 2006 (per Institutional Investor 3/07): credit cards 72% corporate loans COF + 4.5% to 12.5% corporate A/P is 3x bank debt
This slide is out of order, however would like to point out a couple points. Market Share – Euler and Atradius are the top two carriers in the world, we make up about 66% of the total marketshare. Coface 19%, AIG 2% - 19% all other carriers… Total number of credit limit decisions a day amazes me – 22,000 and have information on more than 52 million companeis world wide Based in Amsterdam US Headquarters is in Baltimore MD.
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.
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
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 .
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.
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.
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
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: firstname.lastname@example.org