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Effective and Innovative Uses of Credit Insurance


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  • + 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 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.
  • Transcript

    • 1. 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.
    • 2. Agenda
        • Economic Overview
        • Risks Faced By Credit Managers
        • Effective and Innovative Uses of Credit Insurance
          • What is Credit Insurance
          • Types of Coverage Offered
          • Benefits of Credit Insurance
          • Structures of Credit Insurance Policies
          • Examples of Utilizing Credit Insurance
          • Atradius Advantages
        • Summary & Q&A
    • 3. Funny Sign
      • " Our credit manager is Helen Waite.
      • You want credit go to Helen Waite."
    • 4. 2009 Summary – Q1 (not good news)
      • 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?
    • 5. The Global Economy has Entered Into Recession…(worse news)
    • 6. Recession – What’s The Overall Impact
    • 7. 2009 and Beyond
    • 8. Expected default in Western Europe and USA
    • 9. Risks Faced by Credit Managers
    • 10. 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
    • 11. 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
    • 12. Using Credit Insurance
    • 13.
      • 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?
    • 14. 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 .
    • 15.
      • Commercial Risks
        • Insolvency (Chapter 7, 11)
        • Protracted default (non-payment within 6 months of due-date)
        • DISPUTES are not covered!
      • Country Risks
        • 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
    • 16. 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
    • 17. Comparison of Risk Mitigation Techniques [see handout for footnotes]
    • 18. 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.
    • 19.
      • 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?
    • 20.
      • Credit Limits
        • The insurer approves credit limits on the insured’s (largest) buyers based on the maximum outstanding amount anticipated during the life of the policy.
      • Named-Buyer Coverage
        • “ 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
    • 21.
      • Whole Sales Policy (a.k.a. “whole turnover,” “ground-up”)
        • All domestic and/or export buyers
        • No selectivity
      • Key Account Policy
        • Sufficient spread (e.g. > $100k)
      • Single-Buyer Policy
        • Investment grade quality buyers
        • Premium > $50k
      Common Types of Credit Insurance Policies
    • 22. Policy Variables
      • Cancelable or non-cancelable limits
      • “ Risk attaching” or “Loss occurring”
      • Insured percentage
      • Annual deductible
      • Non-qualifying loss amount
      • Individual buyer limits
      • Discretionary limit
      • Insurer’s maximum policy liability
      • Covered terms of sale
    • 23.
      • A credit management substitute.
      • 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
    • 24. Benefits of Trade Credit Insurance
      • Protect your company against catastrophic events
      • Enhance credit management
      • Improve financing
      • Increase sales
    • 25. 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!
    • 26. 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!
    • 27. 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.”
    • 28.
      • 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.
    • 29.
      • 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
    • 30. 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
    • 31.
      • 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
    • 32.
      • General information on the policy;
      • Credit limit administration
        • Requests
        • Modifications
        • Customized Reporting
      • Policy Administration
        • Communication of recent activities or events.
          • Past due reporting
          • Claims processing
          • Sales Reporting
      Atradius´s on-line information system supports our customers in all their policy administration activities such as: [email_address] on-line information system
    • 33.
      • 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
        • Policy reporting
          • 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)
    • 34. 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
      • 30,000 customers
      • 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
    • 35. 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
    • 36. Atradius Shareholders
      • 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)
    • 37. Atradius’ Reinsurers
    • 38. 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
    • 39. 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
    • 40. 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:
    • 41. Logo slide