Credit Risk Insurance

What is Trade Credit Insurance?

For Exports, Trade Credit Insurance policies add a layer of Political Risk coverage which includes:

Commercial Risk – Buyer’s Bankruptcy, Insolvency, Default or Slow Payment.

Political Risk – inability to pay because of:

• War, Political Violence, Strike, Riot, Revolution
• Currency exchange transfer blockage
• Sanction or Embargo by Buyer or Seller’s Government
• Cancellation of an import or export license or other trade restriction
• Acts by the Buyer’s Government which prevent payment or other contractual obligations

What types of transactions can be covered?

A common misconception is that the seller must insure all of its receivables in a credit insurance program. While that was the case many years ago, the market has evolved to accommodate the following types of programs:

• Sales to a Single Buyer – repeat sales under a credit limit or a one-off sale
• Sales to Key Buyers, usually the top 10 to 25 buyers
• Sales to Multiple Buyers, such as:
  
  • A foreign dealer network
  • All export sales
  • All sales from a specific division, product line, market segment
  • Whole turnover programs

Generally, these programs cover receivables with due dates from 1 to 360 days. Trade Credit Insurance is also widely available for medium-term receivables such as loans, promissory notes and leases. Trade Credit Insurance for medium term transactions is available for domestic and export, transactions.

Why do firms purchase Trade Credit Insurance?

Increased Sales - Selling on a cash-in-advance basis sends a clear message to the buyer: You are not trusted. Selling with a Letter of Credit or other documentary collections is expensive and time consuming for both buyer and seller. Selling on insured, open account terms provides a balance between aggressive sales needs and responsible credit practice. The ability to lengthen sales terms and increase credit limits are often the key to increased business.

Selling in New Markets - Whether it’s an unfamiliar customer set because of a new product or acquisition or sales in a new country, Trade Credit Insurance helps you sell to those buyers safely.

Export Risk Mitigation - A bad debt loss in the Seller’s home country is often handled easily. A loss to an export buyer brings a host of new challenges: What rights and standing do creditors have in a foreign court? How efficiently are insolvency claims handled? Is the legal system corrupt? The questions and expense can be daunting. With Trade Credit Insurance, the Seller is promptly paid after a claim, and the insurer – who is accustomed to handling international debt recoveries – is subrogated the rights to the debt.

Financing - Without Trade Credit Insurance, banks are often unwilling to lend against the full value domestic and export receivables in a firm’s borrowing base, resulting in reduced borrowing availability. Banks will often exclude foreign receivables entirely and will limit the value allowed for key accounts. Trade Credit Insurance assures banks and other financial institutions that accounts receivable are protected by an investment-grade insurer. This allows them to lend against insured receivables at substantially higher values. The result
is increased borrowing availability – often at lower cost – for the seller.

Catastrophic Loss Protection - The bankruptcy or insolvency of a key buyer will likely cause severe financial distress to the seller. Production interruptions, financial covenant violations and loss of market confidence can result. In the worst case, the buyer’s bankruptcy causes the seller’s bankruptcy in a catastrophic chain reaction.

Outsourcing - Sellers without a formal credit department or whose department lacks the expertise to analyze the transactional risks to an export sale often use trade credit insurers to help set appropriate credit limits.

Efficiency - Many trade credit insurers have vast databases of public and proprietary buyer information which enables very rapid credit limit request decisions. In many cases, the underwriting of credit limits requests on export buyers are done in that country. This results in faster decisions by an underwriter familiar with the local business climate and regulations.

Effective Budgeting - Many firms use Trade Credit Insurance as a tool to quantify a worst case bad debt loss. As a business expense, Trade Credit Insurance premiums are typically tax deductible, while reserves require differing accounting treatment.

Political Risk Insurance

Political Risk Insurance for Foreign Assets, Investment & Contracts

Companies with business or investments overseas must accept and manage political risk. The keys to long-term financial success often lie in how these risks are managed.

Political Risk Insurance policies are highly customized based on the investment exposure and country risk. Coverage varies depending on the asset being covered, but most claims arise from hostile action by a foreign government, war, political violence and political force majeure. In many cases, these political risk is specifically excluded in traditional corporate "all risk" policy forms.

Political Risks can include:

The following are typical forms of Political Risk coverage:

Contract Frustration – protects against financial loss arising from non-payment of a receivable, loan or service agreement between a public, quasi-public or private buyer. Government action or political risk must cause the payment default.

Overseas Investment / Equity / JV Interest - covers the loss of foreign investment or interest because of government action and other political risks.

Currency Inconvertibility – covers debt repayment, dividends or return of capital against the blockage of currency transfer or legal exchange.

Overseas Contractor’s Plant & Equipment – covers contractors, project managers and global engineering firms from loss or forced abandonment of plant and equipment because of seizure, war, or other political risks

Wrongful Calling of Guarantee – covers the wrongful calling of bid or performance bonds,
letters or credit or other demand guarantee instruments

Overseas Mobile Assets – covers owners, lessors or security interest holders of overseas
commodities or other mobile assets against government action (typically seizure) and political force majeure

Bond Coverage – covers non-payment of bond debt obligation caused by political risk

Structured Trade – covers lenders involved in highly structured transactions against non-payment because of political risk or default caused by a political risk.

Loss of Earnings – similar to contingent business interruption coverage, covers earnings losses caused by a political risk event.

Trade Disruption Insurance

Trade Disruption Insurance (TDI) is a relatively new product developed to address shortcomings in traditional insurance coverage for firms that depend on global supply chains.

Rather than build plants overseas, companies now rely on offshore contract manufacturing to fulfill orders. Goods are manufactured by a variety of suppliers in the developing world and brought to market just in time for sale. Interruption to these supply chains can be financially disastrous.

Political risk coverage has now adapted to these norms by creating TDI. Rather than insuring against the losses caused by political events to goods in transit or bricks and mortar, it insures against the loss of gross or net income caused by the interruption of the supply chain from beginning to end.

Insured perils are very broad allowing the inclusion of political risk force majeure and insolvency risk, but the thrust of the coverage is that it is a business interruption, contingent business interruption and an extra expense loss. A TDI policy acts as an umbrella for traditional Marine, Transit, Business Interruption, Extra Expense and All Risk DIC insurance forms. The policy also fills gaps covering items specifically excluded in these forms.

Trade Disruption events can include:

• Failure of a supplier to deliver goods on time and consequential penalties
• Insolvency or bankruptcy of a supplier
• Closure of ports, railways or airports and blockage of waterways
• War, civil war, political terrorism, revolution, riots, strikes
• Confiscation, deprivation or requisition of a supplier’s business
• Imposition of trade restrictions (license revocations, embargoes, sanctions)
• Diversion or delay of products and equipment necessary to fulfill contract, including penalties
• Power grid failure or disruption
• Damage to material handling equipment in port, rail yard or airport
• Weather related perils such as flood, hurricane, tsunami, typhoon, tornado and earthquake

Financial loss is determined above a time deductible and can include:

• Costs to purchase and deliver goods from an alternative supplier
• Contractual penalties for failing to meet supply, milestone or construction deadlines
• Costs to execute contingency or emergency plans
• Loss of revenue earmarked for corporate dividends or debt repayment
• Loss of tax credits or incentives

Examples where TDI should be used – import and export:

Finance Programs

Through a variety of correspondents in banking and finance, Newstead assists clients who require financing or desire to engage in sales finance programs. Services include:

• Factoring
• Forfait
• Countertrade
• Leasing
• Sale/Discounting of short-term receivables
• Sale/Discounting of medium term receivables
• Domestic and cross-border leases, loans and promissory notes
• Captive finance programs
• Pre-export and working capital finance
• Securitizatons

Marine Credit Insurance

Newstead is able to provide their clients with a range of credit insurance solutions tailored for the marine industry. These include:

Charter Hire Default Insurance – CharterSEACURE

CharterSEACURE offers shipowners and their shareholders certainty with respect to their long term charter income by providing exclusive access to one of the world’s leading credit insurers and a breadth of cover thus far unrivalled in the shipping sector.

CharterSEACURE has been designed to satisfy the requirements of good corporate governance within those shipping companies that are focused on minimising the impact of their charterers default on their long term charter hire payment obligations.

This coverage has been designed to protect bunker suppliers from the non-payment for marine fuels supplied on open account credit terms.

The BunkerSEACURE policy will protect the Insured against the risk of non-payment by their clients for marine fuels. The trigger for non-payment is the event of Insolvency of an insured customer or protracted default. Protracted Default (or slow pay) is usually defined as occurring between 90 and 180 days after the contractual due date for payment.

Shipbuilding Credit Risk Insurance

In today’s market many of the traditional shipbuilding yards’ order books are full until 2012. Shipowners looking to secure a new build contract are forced to look further-a-field to yards in China, Vietnam, India, Poland and Croatia etc.

Often shipowners find that the yards they are contracting with are unable to secure bank or sovereign guarantees and they are forced to decide whether to proceed without adequate security in place.

Distressed Credit - Protection Products

Selling to Financially Distressed Buyers

Business relationships with highly stressed buyers can be extremely difficult to manage. The “Accounts Receivable Put” provides protection to clients selling to extremely high risk buyers in situations where traditional single buyer credit insurance is not available.

Accounts Receivable (A/R) Put Contract
An A/R Put Contract is made between the seller and the protection provider covering sales to a distressed buyer for a specified period of time and is generally structured in the following manner:

• Seller delivers products to distressed buyer, generating an accounts receivable
• Client purchases rights to “put” up to 100% of the accounts receivable to the protection provider upon a “Trigger Event” (in the U.S. usually a Chapter 7 or 11 filing by the distressed buyer)
• Once the “Trigger Event” happens and the “put right” is triggered, the protection provider will pay out the level of protection specified in the contract.

Advantages to A/R Puts:

• The “put right” is non-cancelable for the period of time specified in the contract.
• Settlement is usually within 30 days, with interim settlements customary.
• Though more expensive than credit insurance, it allows the seller to maintain relationships in the face of extreme stress on the buyer, its industry or supply chain.

Industry Coverage

Clients selling to buyers in the following industries are likely candidates for A/R Put protection:

Interested?