Effective and Innovative Uses of Credit Insurance

GROTTO Workshop

July 8th - 9th 2009

Charleston SC

Jesse R. Speltz

Atradius Trade Credit Insurance

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Agenda

Economic Overview Risks Faced By Credit ManagersEffective and Innovative Uses of Credit Insurance

What is Credit InsuranceTypes of Coverage OfferedBenefits of Credit InsuranceStructures of Credit Insurance PoliciesExamples of Utilizing Credit InsuranceAtradius Advantages

Summary & Q&A

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Funny Sign

"Our credit manager is Helen Waite.

You want credit go to Helen Waite."

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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?

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The Global Economy has Entered Into Recession…(worse news)

Recession – What’s The Overall Impact

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2009 and Beyond

2009 and Beyond

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Expected default in Western Europe and USA

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Risks Faced by Credit Managers

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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 riskPolitical risk

Currency fluctuation/devaluation FX risk

Currency inconvertibility Transfer/economic risk

Risks Faced by Credit Managers

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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

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Using Credit Insurance

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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?

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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.

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Commercial Risks Insolvency (Chapter 7, 11)

Protracted default (non-payment within 6months 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

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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 riskPolitical risk

Currency inconvertibility Transfer/economic risk

Risks Faced by Exporters

Contract disputeContract dispute

FX riskCurrency fluctuation/devaluationCurrency fluctuation/devaluation

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Risk Method of Risk Protection

Slow Pay-ment/

Default

Bank-ruptcy

Pre-Ship-ment

Contract Repu-diation

Contract Dispute

Govern-ment

Legis-lation

War/ Coup/ Civil

Turmoil

Disrup- tion due

to Natural Disaster

Cur- rency Incon-vertib-

ility

Cur- rency Fluc-

tuation/ Deval-uation

Unconfirmed, Freely Negotiable L/C

7, 8

Unconfirmed, Non- Negotiable L/C

1 7, 8

Confirmed L/C

1 7, 8

Silent L/C Confirmation

7, 8

Standby L/C

2 1 3 3 3 3 7

Independent/ Demand Guarantee

2 4 3 3 3 3 7

Accessory/ Contract Guarantee/Surety Bond

2 5 7

Forfaiting

7, 8

Factoring

7, 8

(Delcredere) Non-Recourse Sale of Receivables

7, 8

Credit Insurance (Comprehensive)

6 7

Credit Derivatives

7

FX Contracts (Forwards & Options)

Comparison of Risk Mitigation Techniques

[see handout for footnotes]

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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.

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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?

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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

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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

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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

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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

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Benefits of Trade Credit Insurance

Protect your company against catastrophic events

Enhance credit management

Improve financing

Increase sales

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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!

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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!

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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.”

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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.

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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

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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

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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.)

$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

A Simple Example

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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:

Serv@Net on-line information system

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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)

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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

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* Risk underwriting centers

The Atradius Global Network

North America Canada*USA*Mexico*

South America Netherlands AntillesChile

EuropeAustria Luxembourg Belgium* The Netherlands*Czech Republic Norway*Denmark* Poland* Finland* PortugalFrance* Russia Germany* SlovakiaGreece Spain*Hungary Sweden*Iceland Switzerland Ireland* United Kingdom*Italy

OceaniaAustralia*New Zealand*

AsiaChinaHong KongIndiaJapan

AfricaKenya South Africa Tunisia

Middle EastIsrael Lebanon United Arab Emirates

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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)

64.00%

25.00%

9.10%

1.70%

Grupo CyC

Swiss Re

Deutsche Bank

Sal. Oppenheim

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34.45%

31.00%

12.25%

8.45%

8.95%

4.00%

0.90%

AA

AA-

A+

A

A-

BBB+

nr

Atradius’ Reinsurers

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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

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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

Serv@Net 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

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The world leader in credit insurance andreceivables management

Jesse R. SpeltzRegional Vice President

Southeast RegionPhone: 770-641-9331

Fax: 770-641-9338Mobile: 404-353-5651

Email: jesse.speltz@atradius.com

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