The severe, widespread, and persistent economic downturn has featured the retrenchment of bank credit, the “drying up” of letters of credit, and the virtual disappearance of the secondary banking market. These conditions have triggered a significant rise in payment defaults and corporate failures, which in turn have been reflected in a significant increase in claims against trade credit insurance policies.
Indeed, the three major trade credit insurers all had high loss ratios for this coverage line in 2008, and the performance has worsened during the first six months of this year. As a consequence, for the past several months, credit insurers have been reviewing their exposures and reducing them with respect to industry sectors and specific countries, as well as individual buyers. Unfortunately, for businesses seeking to purchase credit insurance, this has translated into an unprecedented reduction in available credit limits.
As the size and frequency of claims rises, both insured businesses and their insurers have become increasingly burdened with claims and collections processing. Furthermore, there is no coverage available at all for certain industry sectors and businesses seeking to insure transactions in specific countries. Businesses that have had significant claims or poor recent loss history are experiencing dramatic premium increases. And, some are finding it difficult or impossible to renew their coverage at any price. Frequently, there is no alternative market once other insurers have seen the loss ratios and/or bad debt experience.
Nonetheless, the news for businesses with potential credit exposures is not completely negative. During the first two quarters of 2009, as the overall level of exposure has increased substantially, the good news is that insurers are still providing coverage albeit at higher costs. The greatest impact has been on what the insurers consider to be high-risk buyers and trades. Meanwhile, many credit insurers continue to be willing to insure businesses that have effective credit management and sound business plans. In fact, even a business in an industry sector or trade region that has had difficulty obtaining coverage in the past may be able to obtain cover if its credit management record is exceptionally strong.
On the other hand, a company with poor credit management—even in what insurers might consider a desirable trade sector—may find it difficult to obtain credit insurance. In this environment, insurance brokers and advisors can help insurers understand an individual company’s credit exposure and make informed underwriting decisions.
Given the challenges present in the traditional insurance market for trade credit insurance, some firms have been exploring alternatives such as “top-up” cover, other insurers, accounts receivable purchase agreements, and government support.
Top-up cover is insurance that sits above whatever protection might be available under a firm’s existing trade credit insurance policy, thus raising the overall amount of protection available to the firm.
While a limited number of insurance companies are willing to provide this type of coverage, it is not available to address risks in all parts of the globe. Further, top-up cover generally has very restrictive terms. Several insurers will only provide this cover if the risk is “investment grade” or better. Most insurers willing to provide the coverage do so to address capacity shortfalls while maintaining strict underwriting standards. There are also potential issues related to the sharing of salvage. Notably, if the top-up insurer doesn’t agree with the primary underwriter’s assessment of the exposure, it will limit its level of participation in the program.
Alternative markets
Smaller credit insurers generally have not recoiled from the market, primarily because they did not cut their rates prior to the credit crisis and have remained prudent in their overall risk taking. While these insurers may be helpful in certain situations, they cannot replace the capacity offered by the major insurers. In general, they tend to be more suited to isolated individual or local exposures rather than more extensive portfolios of credit risk.
With the traditional insurance market for trade credit coverage so challenging, a growing number of business are placing credit risk in their captive insurance companies with excess-of-loss reinsurance provided by multi-line credit insurers. A captive program tends to work well when the insured business has sophisticated credit and collections procedures and is willing to retain a sufficient amount of risk in the form of an aggregate deductible.
There is also a developing market for specific approaches for one-off risks, known as structured trade credit. Although this market is currently dominated by financial institutions seeking to insure trade financings, other large corporations have been able to obtain coverage for certain risks in emerging markets. However, given a recent spike in claims, insurers have become more selective and their premium rates have increased significantly in step with bank loan margins.
Neither the top-up cover nor the structured trade credit market will provide a solution in situations where credit limits have been withdrawn because the business seeking to obtain coverage represents a poor (or declining) risk. Underwriters are being extremely cautious and will avoid any risks they deem to be potentially volatile or unprofitable.
Export Credit Agencies (ECAs)
ECAs appear more pragmatic and are less inclined to reduce their coverage limits than the private sector. By and large, many ECAs have a different mandate than their counterparts in the private sector. Specifically, they must support or help to facilitate exports and, as a result, may tend to be less concerned about an individual risk. In addition, because of government support, they often can taker a longer-term view. ECAs may be useful alternatives for businesses that are exporters and have exposures that are limited to a handful or fewer international markets.
Government support
Some national governments have been willing to provide some degree of support for companies operating in their domestic markets. However, for the most part, these credit facilities have been focused on small and mid-sized enterprises, limited in scope and capacity and expensive in some countries.
Generally, it appears unlikely that these facilities will develop quickly enough to address the challenges faced by large, global companies that have seen significant reductions in their trade credit insurance limits. Many governments appear wary of the open-ended commitment that may be required to support larger domestic insurance limits.
Finding a solution
While no readily available pool of trade credit insurance exists to underwrite marginal and problematic risks declined by the major credit insurers, businesses should try to work more closely with current insurance markets to appeal limit reductions and policy non-renewals. It is worth noting that some limit reductions arise not from specific concerns about individual buyers, but from general concerns about the trade, country, or requirements from shareholders or reinsurers to reduce the level of trade credit exposure across an insurer’s overall risk portfolio.
Insurers can be part of the solution by improving their risk assessment capabilities and providing reinsurers with adequate returns on their credit risk. This will enable them to attract sufficient risk capital in the future.
While the reinsurers’ appetite for credit risk eventually may return to historic levels, it is currently hard to predict when that might happen. In the interim, businesses with trade credit exposures need to work with their insurance brokers and risk advisors to assess all potential solutions for risk transfer and risk mitigation, including those outside of insurance.
In this environment multinational businesses can take a number of steps to assess and manage their receivable risks, including the following:
Negotiations with insurers
If trading experience is excellent, explore appealing for a reduced or withdrawn credit limit.
This appeal will have to be supported with specific information, such as up-to-date accounts.
The older the accounts, the more important other information becomes, such as management accounts.
Other “underwriting type” controls should be examined; these will include stock and sales returns, a forward order statement, regular aging returns (trading experience) to the underwriter, and retention of title, for example.
Given the downturn, the limit may no longer be required at the same level; this needs to be investigated, as some businesses treat the retention of limits almost as a non-negotiable requirement even if they are not used.
If a shorter credit period can be negotiated, a lower limit may suffice.
Claims management
Make sure claims are filed promptly and within the parameters of the policy.
Engage your claims brokers and insurers as soon as a potential loss is discovered so that proper filing procedures can be followed.
Alternative products
All available insurance markets should be fully explored.
For certain firms that qualify, the “Accounts Receivable Put Option” market may be a viable option if your company’s profit margins can support the high premium cost.
For businesses with strong credit and collections management, and the ability to retain risk, the use of captive insurance companies should be explored. It is possible to combine a third-party credit management system with an excess-of-loss captive program.
Single-risk accounts that are financially viable but too large for the current insurer might choose to explore either top-up cover (where available) or indications from the structured trade market, potentially on a syndicated basis.
In short, the takeaway for businesses with trade credit insurance is that while these challenging insurance market conditions persist for this coverage—and even beyond—they need to be working closely with their insurance brokers and advisors to forge stronger relationships with their current insurers and others providing various forms of trade credit coverage. This will help maximize coverage opportunities or options in this environment. Meanwhile, insurance companies will need to improve communication with their trading partners and consider alternative underwriting and pricing models to help reduce the likelihood of a repeat of the challenges associated with trade credit coverage that have occurred during the current global economic downturn.
Thursday, December 17, 2009
Germany to subsidise firms' credit insurance -body
FRANKFURT Dec 14 (Reuters) - The German government will subsidise commercial risk insurance to help companies keep the flow of industrial goods moving, the country's insurance industry body said on Monday.
The state has reached a deal with credit insurers in which Germany will make 7.5 billion euros ($11 billion) in guarantees available through the end of 2010 for additional insurance cover when credit insurers are unwilling or unable to take on the risk, GDV said.
The agreement comes months after industry groups said the insurers had left them in the lurch during the crisis by slashing the availability of cover for non-payment of goods and other commercial contracts, a charge the insurers have denied.
"We hope that the programme will prove its worth and we will help the government set it up," said Peter Ingenlath, the chairman of GDV's credit insurance committee.
Under the programme, Germany may provide additional risk cover up to a level matching that provided by a private credit insurer, though the set 2.88 percent annual premium for the additional cover is well above the cost of commercially available insurance, GDV said.
Credit insurers will handle the business and pass the cost for additional cover directly to the government, which should simplify the process for corporate customers, GDV said.
France has a similar programme, in which the state can step in to help a company if a credit insurer reduces coverage limits or declines to extend risk cover.
Bundesbank President Axel Weber last week expressed scepticism about the government covering such commercial defaults, saying it entailed considerable risk for taxpayers.
UNDERWRITING LOSS
The rise in corporate insolvencies in the wake of the financial crisis has boosted losses at credit insurer. GDV predicted that costs and damage claims would reach 114 percent of premium income this year, leading to an underwriting loss of 200 million euros in the segment in 2009.
Premiums in the segment are expected to fall 1.5 percent to 1.4 billion euros this year, GDV said.
Germany's five biggest credit insurers currently have about 39,600 domestic contracts on their books, compared with 38,800 at the end of 2007 before the economic crisis, the industry body said.
"This is clear evidence that credit insurers are standing by their clients," GDV's Ingenlath said.
Credit insurance in Germany is dominated by three players -- Allianz unit Euler Hermes, Atradius and French credit insurer Coface, part of French investment bank Natixis, which together have 90 percent of the market.
The head of Euler Hermes, the world's biggest credit insurer, has predicted that the number of global insolvencies would rise by a third this year and increase again in 2010.
The state has reached a deal with credit insurers in which Germany will make 7.5 billion euros ($11 billion) in guarantees available through the end of 2010 for additional insurance cover when credit insurers are unwilling or unable to take on the risk, GDV said.
The agreement comes months after industry groups said the insurers had left them in the lurch during the crisis by slashing the availability of cover for non-payment of goods and other commercial contracts, a charge the insurers have denied.
"We hope that the programme will prove its worth and we will help the government set it up," said Peter Ingenlath, the chairman of GDV's credit insurance committee.
Under the programme, Germany may provide additional risk cover up to a level matching that provided by a private credit insurer, though the set 2.88 percent annual premium for the additional cover is well above the cost of commercially available insurance, GDV said.
Credit insurers will handle the business and pass the cost for additional cover directly to the government, which should simplify the process for corporate customers, GDV said.
France has a similar programme, in which the state can step in to help a company if a credit insurer reduces coverage limits or declines to extend risk cover.
Bundesbank President Axel Weber last week expressed scepticism about the government covering such commercial defaults, saying it entailed considerable risk for taxpayers.
UNDERWRITING LOSS
The rise in corporate insolvencies in the wake of the financial crisis has boosted losses at credit insurer. GDV predicted that costs and damage claims would reach 114 percent of premium income this year, leading to an underwriting loss of 200 million euros in the segment in 2009.
Premiums in the segment are expected to fall 1.5 percent to 1.4 billion euros this year, GDV said.
Germany's five biggest credit insurers currently have about 39,600 domestic contracts on their books, compared with 38,800 at the end of 2007 before the economic crisis, the industry body said.
"This is clear evidence that credit insurers are standing by their clients," GDV's Ingenlath said.
Credit insurance in Germany is dominated by three players -- Allianz unit Euler Hermes, Atradius and French credit insurer Coface, part of French investment bank Natixis, which together have 90 percent of the market.
The head of Euler Hermes, the world's biggest credit insurer, has predicted that the number of global insolvencies would rise by a third this year and increase again in 2010.
Sunday, December 13, 2009
Trade Credit Insurance and the Global Credit Crisis
The severe, widespread, and persistent economic downturn has featured the retrenchment of bank credit, the “drying up” of letters of credit, and the virtual disappearance of the secondary banking market. These conditions have triggered a significant rise in payment defaults and corporate failures, which in turn have been reflected in a significant increase in claims against trade credit insurance policies.
Indeed, the three major trade credit insurers all had high loss ratios for this coverage line in 2008, and the performance has worsened during the first six months of this year. As a consequence, for the past several months, credit insurers have been reviewing their exposures and reducing them with respect to industry sectors and specific countries, as well as individual buyers. Unfortunately, for businesses seeking to purchase credit insurance, this has translated into an unprecedented reduction in available credit limits.
As the size and frequency of claims rises, both insured businesses and their insurers have become increasingly burdened with claims and collections processing. Furthermore, there is no coverage available at all for certain industry sectors and businesses seeking to insure transactions in specific countries. Businesses that have had significant claims or poor recent loss history are experiencing dramatic premium increases. And, some are finding it difficult or impossible to renew their coverage at any price. Frequently, there is no alternative market once other insurers have seen the loss ratios and/or bad debt experience.
Nonetheless, the news for businesses with potential credit exposures is not completely negative. During the first two quarters of 2009, as the overall level of exposure has increased substantially, the good news is that insurers are still providing coverage albeit at higher costs. The greatest impact has been on what the insurers consider to be high-risk buyers and trades. Meanwhile, many credit insurers continue to be willing to insure businesses that have effective credit management and sound business plans. In fact, even a business in an industry sector or trade region that has had difficulty obtaining coverage in the past may be able to obtain cover if its credit management record is exceptionally strong.
On the other hand, a company with poor credit management—even in what insurers might consider a desirable trade sector—may find it difficult to obtain credit insurance. In this environment, insurance brokers and advisors can help insurers understand an individual company’s credit exposure and make informed underwriting decisions.
Given the challenges present in the traditional insurance market for trade credit insurance, some firms have been exploring alternatives such as “top-up” cover, other insurers, accounts receivable purchase agreements, and government support.
Top-up cover is insurance that sits above whatever protection might be available under a firm’s existing trade credit insurance policy, thus raising the overall amount of protection available to the firm.
While a limited number of insurance companies are willing to provide this type of coverage, it is not available to address risks in all parts of the globe. Further, top-up cover generally has very restrictive terms. Several insurers will only provide this cover if the risk is “investment grade” or better. Most insurers willing to provide the coverage do so to address capacity shortfalls while maintaining strict underwriting standards. There are also potential issues related to the sharing of salvage. Notably, if the top-up insurer doesn’t agree with the primary underwriter’s assessment of the exposure, it will limit its level of participation in the program.
Indeed, the three major trade credit insurers all had high loss ratios for this coverage line in 2008, and the performance has worsened during the first six months of this year. As a consequence, for the past several months, credit insurers have been reviewing their exposures and reducing them with respect to industry sectors and specific countries, as well as individual buyers. Unfortunately, for businesses seeking to purchase credit insurance, this has translated into an unprecedented reduction in available credit limits.
As the size and frequency of claims rises, both insured businesses and their insurers have become increasingly burdened with claims and collections processing. Furthermore, there is no coverage available at all for certain industry sectors and businesses seeking to insure transactions in specific countries. Businesses that have had significant claims or poor recent loss history are experiencing dramatic premium increases. And, some are finding it difficult or impossible to renew their coverage at any price. Frequently, there is no alternative market once other insurers have seen the loss ratios and/or bad debt experience.
Nonetheless, the news for businesses with potential credit exposures is not completely negative. During the first two quarters of 2009, as the overall level of exposure has increased substantially, the good news is that insurers are still providing coverage albeit at higher costs. The greatest impact has been on what the insurers consider to be high-risk buyers and trades. Meanwhile, many credit insurers continue to be willing to insure businesses that have effective credit management and sound business plans. In fact, even a business in an industry sector or trade region that has had difficulty obtaining coverage in the past may be able to obtain cover if its credit management record is exceptionally strong.
On the other hand, a company with poor credit management—even in what insurers might consider a desirable trade sector—may find it difficult to obtain credit insurance. In this environment, insurance brokers and advisors can help insurers understand an individual company’s credit exposure and make informed underwriting decisions.
Given the challenges present in the traditional insurance market for trade credit insurance, some firms have been exploring alternatives such as “top-up” cover, other insurers, accounts receivable purchase agreements, and government support.
Top-up cover is insurance that sits above whatever protection might be available under a firm’s existing trade credit insurance policy, thus raising the overall amount of protection available to the firm.
While a limited number of insurance companies are willing to provide this type of coverage, it is not available to address risks in all parts of the globe. Further, top-up cover generally has very restrictive terms. Several insurers will only provide this cover if the risk is “investment grade” or better. Most insurers willing to provide the coverage do so to address capacity shortfalls while maintaining strict underwriting standards. There are also potential issues related to the sharing of salvage. Notably, if the top-up insurer doesn’t agree with the primary underwriter’s assessment of the exposure, it will limit its level of participation in the program.
EU Approves Swedish Export-Credit Aid Scheme
BRUSSELS (Dow Jones)--The European Commission Wednesday approved a Swedish plan to provide export credit insurance to companies that are unable to get cover on the private market, aimed at tackling the effects of the financial crisis on exporting firms.
"The Swedish scheme provides exporting firms with the insurance cover they need and, at the same time, contains adequate safeguards to avoid the crowding-out of private companies from the credit insurance market," competition commissioner Neelie Kroes said.
Under the plan, the Swedish state agency will provide short-term export-credit insurance coverage to companies established in Sweden. Only financially sound applications will be eligible for support under the scheme, the commission said.
The risk premiums will depend on the buyer's creditworthiness and on the level of political risk relating to the buyer's location. The maximum coverage the government agency will accept is limited at 90%, the commission added.
The insurance plan can stay in force until the end of 2010, the commission said.
"The Swedish scheme provides exporting firms with the insurance cover they need and, at the same time, contains adequate safeguards to avoid the crowding-out of private companies from the credit insurance market," competition commissioner Neelie Kroes said.
Under the plan, the Swedish state agency will provide short-term export-credit insurance coverage to companies established in Sweden. Only financially sound applications will be eligible for support under the scheme, the commission said.
The risk premiums will depend on the buyer's creditworthiness and on the level of political risk relating to the buyer's location. The maximum coverage the government agency will accept is limited at 90%, the commission added.
The insurance plan can stay in force until the end of 2010, the commission said.
Thursday, August 20, 2009
UK Govt Changes Credit Insurance To Ease Access
LONDON (Dow Jones)--The U.K. government Thursday bowed to pressure from business groups and said it is making further changes to its trade credit insurance scheme to reduce the cost for companies and ease access.The government also released numbers showing that the scheme has so far been taken up by only a few dozen companies, a fresh sign that government programs to cushion the recession's impact have had mixed success.
A spokeswoman for the U.K. Department for Business, Innovation and Skills told Dow Jones Newswires that the department is halving the cost of the scheme to 1% from 2% of the cover being provided. She said the government is extending the upper limit on the topup cover to GBP2 million from GBP1 million. It is also removing a previous floor of GBP20,000 for companies seeking government cover.
The changes, later confirmed by the government in a press release, follow a concerted campaign from business groups, which said companies are continuing to suffer from disruptions to their supply lines due to the lack of credit insurance. A recent survey from the Confederation of British Industry said access to credit insurance declined "rapidly" in the three months to July.
Trade credit insurance is used to protect suppliers against the risk of non-payment by buyers of goods. The insurance, which is vital in maintaining supply lines, was thrown into the spotlight after cover was reduced on suppliers to a number of prominent companies, including the now-collapsed U.K. retailer Woolworths Group.
The topup scheme allows suppliers to buy government-backed insurance to restore cover to the original level of protection or double the amount of insurance they are able to obtain from the private sector up to a value of GBP2 million. The scheme will end at the close of 2009.
The latest move represents the second time the scheme has been modified since its launch May 1.
The government set a cap of GBP5 billion for the total insurance cover it is prepared to provide. But Thursday it said, thus far, 52 companies have had their applications to use the scheme approved, resulting in cover of GBP7.1 million.
The fact that only a slither of that coverage has been used suggests the credit insurance scheme hasn't been as effective in helping smaller companies, in particular, as the government had hoped. That is part of a broader story, during the recession, where several of the government's much-trailed programs for businesses, struggling mortgage holders and jobseekers haven't generated much demand.
But the government has always stressed the GBP5 billion coverage ceiling is a maximum, not a target. Officials have said the scheme is meant to provide targeted, temporary help for those businesses caught out by rapidly changing credit and economic conditions.
The spokeswoman said there is evidence the scheme has helped achieve that, with companies now adapting to reduced access to trade credit insurance, which during the boom years was a cheap alternative enabling firms to hold less working capital.
"The government's topup scheme is providing temporary help for businesses as they readjust to changed conditions. Our evidence indicates that the majority of businesses are now managing their credit risks actively, reducing their dependence on trade credit insurance," the spokeswoman said.
Reaction to the government's move was mixed, with the British Retail Consortium saying the scheme needs to be back-dated further.
"The government's decision to improve some elements of the trade credit insurance top-up scheme may help a few but the changes don't go far enough. To make a real difference the scheme needs to be back dated to last April - when insurers began removing cover as the recession began," BRC Business Environment Director Tom Ironside said.
However, trade credit insurance companies Atradius Credit Insurance NV and Euler Hermes SA UK (ELE.FR), welcomed the changes, saying they addressed issues the firms had raised with the government.
"We are pleased that the government have taken our feedback on board and that they remain committed to increasing the relevance of the trade credit insurance top-up scheme," an Atradius spokesman said.
A spokeswoman for the Association of British Insurers, which was involved in developing the scheme, also welcomed the changes. She said the industry currently insures some GBP300 billion of U.K. trade.
Home Retail sounds alarm on credit insurance risks
Argos and Homebase parent Home Retail Group has written to its suppliers urging them not to do business with retailers that have had their credit insurance removed.
In a letter, seen by Retail Week, Home Retail Asia managing director Graham Kibby wrote: “In the event that credit insurance is refused for one of your customers we strongly recommend that
you do not do further business, as it is quite likely that you will not get paid.”
He said it is “an extremely dangerous practice” for suppliers to continue to work with any open account customers that cannot get credit insurance cover.
The move has sparked anger among rival retailers, with critics accusing Home Retail of piling more pressure onto struggling store groups already suffering from a withdrawal of credit insurance.
Many retailers have had some or all of their credit insurance scaled back since the recession hit, including DSGi and Focus. A withdrawal of credit insurance was one of the key contributors to the demise of 99-year-old chain Woolworths.
A Home Retail spokesman said that it accepted “the letter could have been worded better” but it was intended to raise suppliers’ awareness of a “serious issue”.
He said that Home Retail wanted to offer some “practical advice that would help to protect their interests” and added it is “not company policy to insist on suppliers holding credit insurance”. The letter also said Home Retail’s credit rating “remains very good”, and added “like many, we are experiencing a slowdown in current trading, but we do have cash in the bank and retain the confidence to lend within the banking sector”.
The spokesman said the letter was sent to a “small number of Argos and Homebase suppliers in Asia, alerting them to an industry issue”.
But one rival retailer feared suppliers would stop doing business with them as a result. The retailer said: “Home Retail is a big player. If you’re a supplier you might take notice.”
Retail Knowledge Bank senior partner Robert Clark said: “It’s a perfectly valid point that Home Retail doesn’t want its suppliers getting over-committed to retailers that might collapse,
but there are other ways to go about things.”
In a letter, seen by Retail Week, Home Retail Asia managing director Graham Kibby wrote: “In the event that credit insurance is refused for one of your customers we strongly recommend that
you do not do further business, as it is quite likely that you will not get paid.”
He said it is “an extremely dangerous practice” for suppliers to continue to work with any open account customers that cannot get credit insurance cover.
The move has sparked anger among rival retailers, with critics accusing Home Retail of piling more pressure onto struggling store groups already suffering from a withdrawal of credit insurance.
Many retailers have had some or all of their credit insurance scaled back since the recession hit, including DSGi and Focus. A withdrawal of credit insurance was one of the key contributors to the demise of 99-year-old chain Woolworths.
A Home Retail spokesman said that it accepted “the letter could have been worded better” but it was intended to raise suppliers’ awareness of a “serious issue”.
He said that Home Retail wanted to offer some “practical advice that would help to protect their interests” and added it is “not company policy to insist on suppliers holding credit insurance”. The letter also said Home Retail’s credit rating “remains very good”, and added “like many, we are experiencing a slowdown in current trading, but we do have cash in the bank and retain the confidence to lend within the banking sector”.
The spokesman said the letter was sent to a “small number of Argos and Homebase suppliers in Asia, alerting them to an industry issue”.
But one rival retailer feared suppliers would stop doing business with them as a result. The retailer said: “Home Retail is a big player. If you’re a supplier you might take notice.”
Retail Knowledge Bank senior partner Robert Clark said: “It’s a perfectly valid point that Home Retail doesn’t want its suppliers getting over-committed to retailers that might collapse,
but there are other ways to go about things.”
Business insurance scheme gets poor take-up
A widely promoted government scheme offering up to £5bn to help protect suppliers from the collapse of their customers has so far provided only £7m of assistance to 52 companies.Announced in the Budget, the government’s trade credit insurance top-up scheme was designed to shore up the market as nervous private sector insurers cut their exposure during the credit crisis.
On Thursday, the business department said it was widening its criteria and cutting charges to 1 per cent to enable more entrepreneurs to take up the initiative. The paucity of the take-up is an embarrassment for the government, given that it was forced to loosen the scheme once before.
“The scheme is £5bn, but we have never assumed that it would get to that level. That’s the amount in the programme should there ever be sufficient demand,” the business department said.
The scheme allows suppliers to buy six months of government-backed insurance either to restore cover to its original level or to double the amount they can obtain from the private sector. The four largest credit insurers have all signed up to the initiative: Euler Hermes, Atradius, Coface and HCC.
Overall, the private sector provides £300bn of trade credit insurance a year covering transactions by about 250,000 companies.
In June the department bowed to pressure from business to backdate eligibility to include suppliers that had had cover reduced since last October.
The British Retail Consortium, the trade body for retailers, on Thursday welcomed the government’s latest move, but said the scheme needed to be backdated until April 1, when insurers began removing cover.
Tuesday, August 4, 2009
CREDIT MARKETS: Healthy High-Grade, Asset-Backed Issuance
NEW YORK(Dow Jones)--New note issuance reached robust levels for August in a couple of credit-market sectors Tuesday, particularly high-grade corporates and asset-backed securities.
Investment-grade issuance got a boost as earnings blackout periods expired, while asset-backed volume picked up ahead of a key deadline for government backing of new deals.
Credit markets digested some mixed June economic data on the day, as personal income saw the sharpest drop in four years during June while pending home sales climbed for a fifth straight month, offering a sign of improvement for housing and the overall economy.
"All these deals are being gobbled up," said Greg Habeeb, head of taxable fixed income at Calvert Asset Management.
General Electric Capital Corp., the finance arm of industrial conglomerate General Electric (GE), offered $2 billion in non-guaranteed 10-year notes. On July 22, GE said the Federal Deposit Insurance Corp. approved its exit from the guarantee program.
"The offering supports the funding plan we presented in our GE Capital investor meeting last week," said GE spokesman Russell Wilkerson in an email.
Bank of America, Barclays Capital, Deutsche Bank and RBS Greenwich Capital were underwriters.
GECC remains the biggest borrower under the FDIC program, having issued $50.7 billion of debt excluding commercial paper. It has sold only $6.9 billion without the backing, excluding Tuesday's issue, according to Dealogic.
Dow Chemical (DOW) offered $2.5 billion in notes maturing in 2012 and 2015. The deal includes protective provisions, including change of control compensation and coupon steps. The proceeds will go toward repaying a portion of borrowings under the term loan that financed the company's merger with Rohm & Haas. Underwriters were Barclays Capital, Citigroup, HSBC and Morgan Stanley.
FirstEnergy Corp. (FE) offered $1.5 billion in three parts, and Coca-Cola $250 million 10-year notes. The deals saw risk premiums at the lower end of guidance, a sign of strong demand.
As bond yields fall and after stock returns outperformed bonds in July, analysts from both Bank of America Merrill Lynch and JP Morgan expect investors to turn to stocks rather than debt.
"This is not a negative for credit but a logical step in the economic cycle as investors seek out higher yields," wrote JP Morgan analysts, adding that yields would likely stabilize even as stock prices rise.
Investment-grade issuance got a boost as earnings blackout periods expired, while asset-backed volume picked up ahead of a key deadline for government backing of new deals.
Credit markets digested some mixed June economic data on the day, as personal income saw the sharpest drop in four years during June while pending home sales climbed for a fifth straight month, offering a sign of improvement for housing and the overall economy.
"All these deals are being gobbled up," said Greg Habeeb, head of taxable fixed income at Calvert Asset Management.
General Electric Capital Corp., the finance arm of industrial conglomerate General Electric (GE), offered $2 billion in non-guaranteed 10-year notes. On July 22, GE said the Federal Deposit Insurance Corp. approved its exit from the guarantee program.
"The offering supports the funding plan we presented in our GE Capital investor meeting last week," said GE spokesman Russell Wilkerson in an email.
Bank of America, Barclays Capital, Deutsche Bank and RBS Greenwich Capital were underwriters.
GECC remains the biggest borrower under the FDIC program, having issued $50.7 billion of debt excluding commercial paper. It has sold only $6.9 billion without the backing, excluding Tuesday's issue, according to Dealogic.
Dow Chemical (DOW) offered $2.5 billion in notes maturing in 2012 and 2015. The deal includes protective provisions, including change of control compensation and coupon steps. The proceeds will go toward repaying a portion of borrowings under the term loan that financed the company's merger with Rohm & Haas. Underwriters were Barclays Capital, Citigroup, HSBC and Morgan Stanley.
FirstEnergy Corp. (FE) offered $1.5 billion in three parts, and Coca-Cola $250 million 10-year notes. The deals saw risk premiums at the lower end of guidance, a sign of strong demand.
As bond yields fall and after stock returns outperformed bonds in July, analysts from both Bank of America Merrill Lynch and JP Morgan expect investors to turn to stocks rather than debt.
"This is not a negative for credit but a logical step in the economic cycle as investors seek out higher yields," wrote JP Morgan analysts, adding that yields would likely stabilize even as stock prices rise.
Hospital aims to reduce traffic in its ER
BRANDON - With $34 million in uncompensated care for uninsured patients in 2007, hospital officials here are scrambling to find innovative ways to make up at least a fraction of their losses and lessen wait times in the emergency room.
When patients with no insurance and noncritical needs come to the emergency room for treatment at Brandon Regional or at South Bay Hospital in Sun City Center, they now are given several options: Pay $150 up front to cover the bill or seek help at one of the many walk-in clinics in the area.
The alternative is to get treatment without paying, then suffer the loss of personal credit down the road.
So far, the program hasn't been very successful, said Brandon Regional marketing director Melonie Hall.
"A little bit of it is cultural. So many people still feel the ER is for anything and everything," Hall said. "We have such a huge job to educate people."
"The results have been mixed, at best," said Brandon Regional Chief Executive Officer Mike Fencel. "Obviously, our priority is to provide health care to all that come. But, paying customers end up helping to pay for uncompensated care."
Twenty-one percent of Floridians are uninsured, according to the federal Web site healthreform.gov. And employer-covered insurance decreased from 54 percent to 50 percent between 2000 and 2007. Much of the decline is among workers in small businesses, which make up 78 percent of Florida businesses, according to the site.
And the overall quality of care in Florida is rated as "weak," according to the Agency for Health Care Research and Quality. Preventive care, which keeps people healthier and out of the hospital, is lacking, according to the agency. That, too, is directly related to a lack of health insurance.
With national health care reform on the table, Fencel said he knows as a high earner he and people like him will likely pay more in insurance costs. But the hospital will receive direct benefits if more people are covered, which, in turn, will help those who do have insurance.
Hall said she is compiling a verified list of clinics in the Brandon area and may do a similar list for South Shore if the public expresses interest. She said the list should be available in the coming weeks.
If the program takes off, it should cut down on wait times for more critical patients coming to the ER and could result in a decrease in uncompensated care.
Friday, July 10, 2009
Germany agrees credit insurance role to help firms
BERLIN, July 10 (Reuters) - The German government has agreed a plan to offer companies guarantees to enable them to get credit insurance, a government source told Reuters on Friday.
A government body responsible for decision-making on state aid had agreed on the plan, which could involve guarantees worth a 'high single-digit billion euro sum', the source said.
Industry groups have complained that credit insurers are cutting back the insurance cover on offer, fearing climbing losses as payment defaults rise.
Under the plan, the state will consider topping up coverage -- for a fee -- if private credit insurers cut the proportion of default risk they cover to significantly less than 50 percent.
Funding for the plan will come from a 115 billion euro government fund set up to help struggling firms.
Credit insurance in Germany is dominated by three players - Allianz's Euler Hermes, Atradius and Coface, part of French investment bank Natixis.
Together they make up around 90 percent of the market and insure 40,000 companies.
Wednesday, July 1, 2009
Credit insurance to help export enterprises
Beijing municipal government has signed a strategic cooperative agreement with the China Export and Credit Insurance Corporation. The move will provide more credit to Chinese exporters, thus cushioning the impact of the financial crisis.
A large number of exporters in China is under rising financial pressure as a result of reduced orders and delayed payment of credit accounts. The agreement signed today will provide more export credit insurance to help reduce export risk. It generally covers commercial loses associated with international trade -- insolvency of the buyer, and bankruptcy.
Chen Zexing, Deputy Director of Beijing Commerce Commission said "Beijing's export enterprises have seen export volume declining due to the impact of the financial crisis. Exports dropped 16 percent year-on-year in the five months between January and May. Now we are making every effort to help enterprises cope with the difficulties and boost exports."
Liang Zhidong, Deputy GM of China Export & Credit Insurance Co. said "This is the fifteenth agreement signed with the Beijing municipal government since the financial crisis first hit. We aim to join hands with local governments to boost export enterprises, safeguard their interests, and strengthen their confidence."
China's export credit insurance coverage is expected to hit 10 percent this year, compared to 3 percent in general trade last year. Earlier in May, the State Council released a series of preferential policies to expand the nation's export credit insurance coverage, as well as arranging 84 billion US dollars in short-term export credit insurance.
A large number of exporters in China is under rising financial pressure as a result of reduced orders and delayed payment of credit accounts. The agreement signed today will provide more export credit insurance to help reduce export risk. It generally covers commercial loses associated with international trade -- insolvency of the buyer, and bankruptcy.
Chen Zexing, Deputy Director of Beijing Commerce Commission said "Beijing's export enterprises have seen export volume declining due to the impact of the financial crisis. Exports dropped 16 percent year-on-year in the five months between January and May. Now we are making every effort to help enterprises cope with the difficulties and boost exports."
Liang Zhidong, Deputy GM of China Export & Credit Insurance Co. said "This is the fifteenth agreement signed with the Beijing municipal government since the financial crisis first hit. We aim to join hands with local governments to boost export enterprises, safeguard their interests, and strengthen their confidence."
China's export credit insurance coverage is expected to hit 10 percent this year, compared to 3 percent in general trade last year. Earlier in May, the State Council released a series of preferential policies to expand the nation's export credit insurance coverage, as well as arranging 84 billion US dollars in short-term export credit insurance.
Thursday, June 18, 2009
Credit card provider suffers computer glitch
Credit card provider Barclays resolved a technical fault yesterday, which had rendered many of its cash machines inaccessible.
Online banking was also hit by the technical fault, meaning that credit card customers were left unable to log in to their accounts.
It is thought that a computer failure in Barclays' Gloucester offices led to the bank's electronic network crashing in the early afternoon.
However, technical experts had the problem fixed by 16:00.
A female customer told the Daily Mail that the glitch had made it impossible for her to use her credit cards abroad.
"I'm currently abroad and can't use ... any of my cards - cash or credit - related to Barclays and when I called the bank I was told they are upgrading their system," she added.
The technical problem affected people in London, the south of England and parts of south Wales.
Barclays retains around 15 million customers in the UK.
Tips for gap year travellers
of thousands of graduates and school leavers will soon be entering the job market – but with high unemployment, a gap year might be preferable until the job situation improves.
The financial responsibilities of travelling require strict budgeting if you don't want to find yourself stranded on the other side of the world requiring the help of parents.
Credit cards offer insurance on purchases, but can mean spending is difficult to control. On the other hand, prepaid cards are ideal for gap year travel as there is no credit facility, so you can spend money without the risk of debt, yet at the same time the holder has the protection and flexibility of a credit card.
Peter Harrison, from price comparison site moneysupermarket.com, said: "Prepaid cards offer the best foreign exchange rates and anyone can have one. But you need to be sure to get one with the lowest fees. Fairfax and CaxtonFX prepaid currency cards are currently the best in the market."
The Fairfax euro currency card has an application fee of £9.95 for orders less than £500 and is free for orders more than that. There is no monthly fee and an overseas ATM fee of £1.50 – less than most British debit cards.
However, if you lose your card Fairfax won't send you a replacement overseas so you might want to consider taking a spare card. The CaxtonFX euro card has no application or monthly fee, but a slightly higher ATM withdrawal fee of £2. It charges £5 to send you a replacement card.
The other advantages of prepaid cards is that should the ''gapper'' run into financial difficulties their parents can top up the card from Britain. Mr Harrison warned travellers to beware of less competitive prepaid cards on the market that often have hidden charges such as an application fee, a monthly fee and overseas usage fees.
The Tuxedo Pay Monthly card for example, has a £9.95 application fee and a £4.99 monthly fee. The onebanking Account prepaid card has an initial fee of £30 and an ongoing monthly fee of £12.95.
It is estimated that 25pc of travellers do not have adequate travel insurance even though gap travellers are more likely to try extreme activities, such as bungee jumping and skydiving. In the same way that holidaymakers pay a premium for winter sports cover, gappers can expect their insurance to cost more.
But the problem is that cash-strapped students are not seeing travel insurance as a financial priority. The Foreign and Commonwealth Office says it gets more referrals for help from gappers than any other type of traveller because of a lack of insurance. The help overseas embassies can give is limited, especially if you cannot meet any required expenses.
Wednesday, June 10, 2009
Concern over credit insurance scheme
THE Government’s planned credit insurance scheme for small businesses will only have a limited impact, a North West-based lender claimed today.Edward Rimmer chief executive of Liverpool-based Bibby Financial Services said he was also concerned about the length of time it has taken for the details of how the scheme will operate to emerge.He said: “At face value, the scheme sounds like a great and extremely timely opportunity for the small business community.
Thursday, June 4, 2009
Rapid growth forecast for online shopping
Internet shopping is set to defy the economic downturn, with higher numbers of people using their credit cards to buy goods online.
A report from Verdict Research shows that total online spending is set to grow from £2.4bn this year to £30bn in 2013 - with branded items such as electronic goods helping to drive up sales.
If the forecast proves correct, it would mean that roughly £1 of every £10 spent on retail goods is transacted via the internet in four years' time.
Verdict Research also identified credit card driven online sales as a potential recession-buster for vendors.
The total retail sector is predicted to contract by 0.6% in 2009, but the online market is on course to grow by 13% over the same period.
Malcolm Pinkerton, senior retail analyst at Verdict Research, commented: "The more affluent groups, who do still have money to spend, continue to appreciate the internet for its convenience, making the channel doubly resilient to the downturn."
He added: "The key for individual retailers is to formulate two clear strategies: one for succeeding through the recession and one targeting growth beyond this, as the online channel begins to approach maturity."
Customers using credit cards, rather than debit cards, to purchase goods online enjoy greater legal protection from fraud.
Section 75 of the Consumer Credit Act allows cardholders to claim against their card issuer, as well as their supplier, if they suffer breach of contract or misrepresentation for items costing over £100.
Increase in credit card rates noted
Card rates top 18%. Credit card costs continue to increase, despite an unchanging Bank of England lending rate.
The average APR offered by UK providers - including those for low rate credit cards - was found by a financial website to have risen above 18% over the past month.
This rising trend comes after the Bank of England embarked on an aggressive rate-cutting policy.
Today, the Bank confirmed that the rate would be held at its current level of 0.5% - the lowest-ever in the institution's history - for another month.
The lending rate stood at over 5% at this time last year.
In theory, reducing the Bank rate would have a knock-on effect on credit card deals.
However, Moneyfacts.co.uk, which conducted the research, suggested that other factors linked to the recession had pushed the APRs up over recent months.
Michelle Slade, analyst at the site, said: "Rising unemployment means that the risk of customers defaulting on their card repayments has increased, which is being passed on through higher rates."
She added: "Competitive credit card deals can still be found on the market, with 0% balance transfer deals available for 16 months and 0% introductory purchase deals for 12 months, but with the increased risk of default, only those with exemplary credit histories are likely to be accepted for the best deals."
Monday, May 11, 2009
Real estate investing making a comeback
Lori Holland is looking up as she walks through a two-century-old house on Lime Rock Road in Smithfield.
“I’m trying to count how many ceilings have to come down,” she explains. “We’re trying to get a handle on what is it actually going to cost before we can get a tenant in.”
Holland and her husband, Stephen E. Holland, hope to buy the house, which is listed at $174,900, as an investment and rent it as two apartments. Improvements before that can happen could cost $100,000.
While the Rhode Island housing market has been on the slide for three years, the Hollands’ plans to make a real estate investment may be part of a revival, though the signs are conflicting.
House prices are at seven-year lows, with the median around $180,000.
But unemployment is high, with nearly 60,000 Rhode Islanders out of work.
Mortgage interest rates are at historic lows, below 5 percent on a 30-year fixed-rate loan.
But banks have tightened credit, requiring better credit scores and more money down.
S. Lawrence Yun, chief economist for the National Association of Realtors, said at a recent conference in Warwick that the Rhode Island housing market might see signs of renewed vigor this year, especially in the second half, but that a full-fledged recovery won’t materialize until next year.
Several local real estate professionals think those signs are already appearing.
“I’m seeing the investors taking advantage of properties that are priced well,” said Karl A. Martone, the real estate agent showing the Smithfield property and president-elect of the Rhode Island Association of Realtors.
Martone also said first-time buyers, spurred by an $8,000 federal tax credit, are starting to enter the market along with empty-nesters, who probably have high levels of equity in their houses and who may walk away with cash in their pocket after scaling down.
The Realtors association recently reported that the median price of a single-family house dropped more than 25 percent in the first three months of the year, compared with to the same period last year. For the same period, the number of sales stayed about even. And houses were taking slightly longer to sell. None of those factors exactly indicate a market about to soar.
But Martone and Stephen C. Tetzner, vice president of the Rhode Island Mortgage Bankers Association, said the first three months of the year were too soon to see the effects of low interest rates, low prices and the tax credit, which was enacted in February. Because the process of buying a house takes several months, any surge in the market wouldn’t show up until the April-May-June quarter is reported, they said.
Both said they have seen signs recently that things could be leveling off, if not improving.
Open houses have attracted more buyers, Tetzner said.
Cash crisis as insurers withdraw
VULNERABLE retailers and suppliers across a raft of industries face a potential cash-flow crisis as trade insurance underwriters, most notably industry leader QBE, curtail their exposure to the sector.
The pull-back in cover has caused deep concern in Europe, where it is having a similar effect on stifling commerce as the lack of credit availability.
Locally, The Australian understands electrical goods manufacturers have been told they will not be covered in relation to goods sold to two well-known retail chains, or will be made subject to more onerous conditions such as 14-day payment terms.
Until now trade insurance, also known as receivables protection, has been a low-profile service routinely extended to suppliers. Locally, QBE has the lion's share, competing with Coface Australia, Euler-Hermes and Atradius.
But international failures such as Circuit City, once the biggest US electronics chain, Woolworths in Britain and, locally, Kleenmaid's $70 million collapse have prompted insurers to tighten the terms of cover.
"If a credit insurer is not prepared to provide credit insurance for a particular retailer, that has to throw up massive warning signs for the supplier," said one local retailer. "It's kind of the opposite of caveat emptor: it's seller beware."
National Association of Retail Traders managing director Kay Spencer said "clear offshore trends", especially in Britain and Europe, implied a looming crisis. It is understood that an influential industry delegation has already approached Canberra with a proposal for a scheme to protect uninsured enterprises.
The British Government last month introduced a $10 billion trade credit insurance scheme available to 14,000 mid-sized businesses, "to mitigate against disruption to the supply chain and cash flow of 250,000 companies they do business with".
According to several insurance sources, QBE took a closer look at its so-called credit and surety business after the departure of two key executives to start a niche practice.
Among other measures, CEO Frank O'Halloran implemented risk management procedures such as weekly reporting. A rival insurer said: "Their guys are doing report after report. Frank is right on this but fortunately or unfortunately they are not pulling out of it."
QBE, the country's biggest general insurer, has exited excessively risky or unprofitable business lines in the past. Last year it stopped selling indemnity cover to stockbrokers and financial advisers after being stung by huge payouts to share traders after the collapse of Opes Prime.
Niche providers are also active in the credit insurance market. "But if one company won't cover, the others will knock you back," Mr Uechtritz said. "The global financial crisis has made people do things a little bit differently."
Attempts to contact QBE were unsuccessful, while other insurers and retailers were reluctant to comment on an issue prompting growing behind-the-scenes angst.
Thursday, April 23, 2009
Making Money Work Harder
AS THE recession drags on, companies both big and small are finding more creative ways to stretch every dollar and make the best use of their capital.
Han Kwee Juan, managing director and Singapore country head of Citi's global transaction services, says that the financial crisis has made companies everywhere think much harder about the way that they use the funds at their disposal.
'One of the main priorities that we've seen from companies in the current environment is to generate new sources of funds,' he says.
That ranges from simple measures such as reducing unnecessary travel or other expenses, to the setting up of highly sophisticated liquidity-management structures used by some large multinational companies to channel cash from subsidiaries worldwide into a common pool.
That companies are looking to milk the most from their available funding sources is no surprise, he adds. 'In the current economic environment, companies are faced with increased challenges in generating sources of funds.'
Tan Yew Kiat, founder and general manager of fashion retailer bYSI International, says that his company recently took out a $500,000 loan under the new government-backed loan scheme administered by Spring Singapore, aimed at helping small and medium enterprises.
'That's really helping our liquidity,' he says.
The company has also been negotiating with its suppliers for better terms, hoping to extend payment deadlines for new supplies from 30 days to as long as 45 days.
Export-oriented players worldwide have been among the hardest hit by the contraction in funding sources and the collapse in demand from major export destinations such as the US and Europe since the financial crisis began.
Last month, the World Trade Organization warned that global trade volume could contract by 9 per cent this year - the biggest such decline in total exports since World War II.
It expects exports from developed economies to fall by an average of about 10 per cent, and exports from developing countries to shrink by 2-3 per cent.
'The depleted pool of funds available for trade finance has contributed to the significant decline in trade flows, in particular, in developing countries,' WTO director-general Pascal Lamy said at the time.
It estimates that world trade volume grew just 2 per cent last year - less than half the 4.5 per cent growth it had forecast a year earlier, mainly due to 'the unexpected and very sharp drop in global production in the fourth quarter of 2008'.
Mr Han says that the traditional sources of capital-market funding such as the commercial paper and bond markets, as well as syndicated loans, 'have shrunk considerably'.
Another problem, he says, is that in the boom years when funding was both cheap and easy to obtain, many companies got used to running their businesses with high working capital needs - extending generous payment terms to customers, paying suppliers quickly, and accumulating large inventories - without incurring much penalty.
'Traditionally, large companies rarely placed a high priority on working capital as the previously abundant and relatively cheap credit meant that the cost of working capital inefficiencies was low.'
Big companies, in particular, had access to a whole range of low-cost financing options besides traditional bank loans.
They could raise the funds that they needed from capital markets by issuing bonds or equity, or hybrid instruments such as convertible bonds. At the height of their popularity in 2007, even smaller companies here were issuing convertible bonds at low interest rates to raise cheap funds.
Convertible bonds give buyers the option to exchange their bonds for shares in the issuing company. That embedded option is especially valuable when investors expect share prices to rise in future, so that companies issuing convertible bonds in a bull market could borrow at much lower interest rates than with ordinary bonds.
'But increasingly, as the cost of borrowing has risen sharply due to the credit crisis, corporates are placing a renewed focus on optimising working capital and finding alternative sources of funding to reduce their reliance on capital markets,' Mr Han says.
Key priorities
As a result, 'preserving and maximising the use of working capital has become a key priority' for most companies, he adds. Now, he sees more companies taking a good, hard look at how they pay suppliers, when they receive payments from customers, and how to make the trade terms more favourable for themselves.
In some cases, the trade terms are no longer determined entirely by the business division in charge of managing sales.
Turning working capital into a source, rather than user, of cash may seem counterintuitive, but it is possible if companies use it more efficiently, he says.
Indeed, the worldwide economic slump that followed the credit crunch has driven up the cost of all kinds of funding, not just borrowing, which makes it even more urgent that companies make the funds that they do have work as hard as possible.
Raising money from the capital markets is still possible for some, 'but it's simply more expensive', Mr Han says. 'For rights issues, for example, you're seeing bigger discounts in today's market than when you have a bull market.'
So in many cases, companies conclude that their least expensive option is to try to deploy their own internal funds as efficiently as possible. An important first step is to examine in detail the way that their cash is used across their entire financial supply chain, says Mr Han.
That includes getting up-to-date information on their cash balances and trade receivables, as well as any cash paid to suppliers and distributors. Companies also need to monitor the cost of any inventory they keep, and their existing relationships with banks and other credit providers that they can tap for funds if necessary.
For bigger players, with a large network of suppliers and distributors that form a complicated supply chain, working out which part of the chain should get priority can be a much more difficult task.
A failure of a key supplier would cause far-reaching disruption to the production pipeline of a manufacturing company, for instance.
He cites as an example a Citi customer, 'a major US apparel retailer', that was concerned that a number of its suppliers - including several based here - were having difficulties obtaining funding from their banks to buy materials and produce clothes.
The retailer approached the bank for assistance, and 'we were able to provide financing throughout its supply chain, by forging collaborative partnerships with banks in those markets, and extending risk participation through its export and agency finance connections'.
In times like these, companies should examine all possible financing options, including those that were previously ignored when bank loans were cheap and easy to get.
'Clearly, with a general reduction in availability of direct credit, companies can turn to other tools available to them. These financing techniques provide incremental credit over the direct credit facilities that they receive from their banks.'
For export-oriented players, these tools include letters of credit from banks, and credit insurance from insurance firms or export credit agencies such as Hermes, Coface or Sinosure.
Here, the Singapore government has also stepped in with new trade finance schemes to help medium-size and large exporters obtain loans and trade insurance, first announced in the Budget on Jan 22.
Since March 1, IE Singapore has offered a trade credit insurance programme, known as the Export Coverage Scheme.
Through this, the government subsidises half the insurance premiums, up to $100,000, for Singapore companies that take out policies with qualified credit insurers.
IE Singapore is also offering to underwrite additional trade credit insurance, up to $10 million, for companies that need coverage exceeding the maximum offered by the private-sector insurers participating in the scheme.
Another government initiative offers to insure up to 75 per cent of the risk on loans under the Loan Insurance Scheme that are beyond the capacity of private-sector insurers.
And despite the overall slump in Singapore's export trade, the business of extending trade finance has actually become more profitable for banks, due partly to the higher rates they can now charge.
As more companies switch from open-account trading - which became popular when the risk of trading partners defaulting was considered small - back to using traditional trade financing products such as letters of credit, some banks have even seen a surge in transactions, although overall trade activity has dropped.
Still, the main reason that more companies are returning to conventional trade financing tools is the worry that their trading partners may default - a risk that banks must also consider when extending a loan.
Three angles
'The evaluation of trade finance credit can be done through three angles,' Mr Han says.
'Clearly, the first angle of evaluation will be based on the financial strength of the company, which will be largely based on its cash flows, level of debt and the types of collateral that it can offer. This is not too dissimilar from straight lending or a regular business loan.'
'But trade finance can also be done based on the incremental collateral that can be gained from a trade flow, such as with letters of credit, where banks provide financing to the company based on the strength of the financial institutions.
'The third angle will be based on the strength of the buyers and their payment behaviour through the years. If a company has financially strong buyers or buyers who have been prompt in their payments, then banks can take comfort from these factors to provide some level of financing as these provide evidence of strong possibilities of repayment for the trade loan extended.
'We have also seen a greater number of requests from clients to obtain financing based on their trade receivables and, in some instances, based on portfolios with credit insurance.'
Overall, he says, the financial crisis has changed the behaviour of many organisations. 'The way the market has evolved has resulted in companies thinking about how to raise financing.'
And that, he believes, is here to stay, even after the economy eventually recovers and financial markets return to normal.
'What we've seen in other crises is that once companies have started to focus on their working capital, they will continue to do so. The practice of squeezing the most from their capital will still be there.'
> first published in The Business Times
Trade Credit Insurance Claims Soar
Insurance claims by companies left unpaid for goods supplied to firms that went bust soared more than 50% in the final three months of 2008, figures have showed.
The Association of British Insurers (ABI) said trade credit insurance claims jumped 51% to 8,366 compared with a year earlier as the recession hit home.
The total value of claims incurred over the period was £360 million, up from £257 million in 2007, the ABI said.
The total value of turnover covered by the major UK trade insurers - such as Atradius, Coface, Euler Hermes and Zurich - reached £302.5 billion in 2008, up from £282 billion the previous year.
Nick Starling, the ABI's director of general insurance and health, said: "The latest rise in trade credit insurance claims, and the value of turnover covered, shows that insurers are playing a crucial role and continue to help their customers through the recession."
There have been concerns over trade credit insurers hiking premiums and pulling out of some high-risk markets such as retail altogether.
Reports last week suggested small and medium-sized firms could gain a boost from new Government guarantees on trade credit insurance in the Budget. According to the report, the Government will offer guarantees for medium-risk companies which have seen their cover reduced, but not withdrawn.
Many firms have been crippled by the withdrawal of trade credit insurance as the recession unfolds.
A decision by insurers to withdraw cover from suppliers to Woolworths hastened the demise of the high street icon at the end of last year as it was forced into more onerous payment terms, draining its cash.
Under a new statement of principles published with the figures, the ABI said UK credit insurers should "give as much notice as is reasonably possible" to customers when deciding to stop or substantially reduce credit insurance cover.
Wednesday, April 22, 2009
Darling move on trade credit wins applause
Business leaders today welcomed Budget plans to protect firms against a reduction of vital trade credit insurance.
Chancellor Alistair Darling is tomorrow expected to announce a temporary scheme to provide top-up insurance cover worth up to £5 billion alongside the same figure from private insurers.
Retailers and small businesses have been hit by the reduction or total withdrawal of credit insurance ,which protects suppliers against a customer failing to pay for goods.
Many insurers have raised premiums or withdrawn from high-risk markets altogether, leaving firms facing demands for upfront payments from suppliers. Such a situation can lead to the sort of cashflow problems that helped to trigger the collapse of Woolworths and MFI.
Darling has agreed to offer guarantees to firms that have seen their cover reduced but not cancelled.
Bill Grimsey, chief executive of Focus DIY and a critic of credit insurers, said this would still leave some firms stranded. “Companies that have had their cover completely withdrawn will find themselves out in the cold still if a top-up measure is introduced,” he said.
But others welcomed the move which comes after months of negotiations between the Government and Atradius, Euler Hermes and Coface, which have 85% of the global market for credit insurance.
The temporary scheme will run from 1 May to New Year's Eve and be available to firms that have seen their cover changed since 1 April this year.
The British Retail Consortium said it was vital for the survival of many firms on the High Street and added that the Government was right not to provide cover in high-risk cases where insurance has been withdrawn.
“We didn't want the Government to take on unnecessary risks,” said spokesman Krishan Rama.
“If the private sector didn't want to provide insurance, we didn't want the Government to take on that risk. We were asking for the Government to match what the private sector was willing to provide, so this is a welcome move.
“Credit insurance is very important because it protects suppliers and if it is withdrawn then suppliers will ask for this money to be paid upfront which leaves retailers with cashflow problems and undermines their ability to trade.”
Steve Radley, chief economist at manufacturing group EEF, said: “This is a package that ticks many of the right boxes and business will broadly welcome it. It is unfortunate that it can't be done retrospectively.”
Monday, March 30, 2009
Rising cost of insurance hits firms
Business suffers another blow as credit insurers make greater demands for new contracts
Small businesses are being hit by a steep rise in the cost of credit insurance taken out to cover bad debts. Many are finding they are unable to get cover at all.
Credit insurers have confirmed they are increasing premiums by up to 40% for clients who are renewing their contracts, and in some cases by much more. They are also refusing to provide cover for some operating in high-risk sectors such as retailing and construction and are turning away large numbers of new customers.
Credit insurance covers small firms for bad debts suffered if one of their business customers is unable to pay, usually because it has become insolvent. Without it, firms themselves are forced to take on the risk of customers not paying. If the amount owed is large and not paid, the business could be forced to close.
Shaun Purrington, regional director at Atradius, one of the biggest credit insurers in Britain, said: “It is fair to say that compared with six months or one year ago small businesses will find it more difficult to get credit insurance. I’m afraid that the appetite of credit insurers to write new policies has declined.
“Companies that come to us and ask for cover on firms [they wish to trade with] that are clearly in financial difficulties, or that are operating in very difficult sectors, will find it nearly impossible to get cover.”
He warned that in addition to rising premiums, typically 30% to 40% up on last year, small businesses renewing their premiums would be asked to take on a greater share of the risk.
“Historically they would have typically taken 10% of the risk whereas now it will rise to 15% or even 20% in some sectors,” he said.
Small-business organisations are outraged over the plight of small firms. Phil Orford, chief executive of the Forum of Private Business, said: “Taking premiums in the good times but pulling cover when conditions worsen is a scandalous affair.
“Credit-insurance companies should be able to manage risk over a defined period, accepting losses as well as sur-pluses. That’s how the insurance industry works across the board. Perhaps this is another financial area requiring tighter regulation in the light of such catastrophic actions.”
He added: “Many businesses of all sizes are finding it is impossible to get any cover at all. The actions of credit insurers make it increasingly difficult for our members to do business with other companies and to protect themselves against increasing instances of late and defaulted payments.”
In a recent survey of its members, the Forum of Private Business found that one in five were experiencing serious difficulties with their credit insurance.
Stephen Alambritis at the Federation of Small Businesses said: “It really is appalling that the industry is pulling back from providing reasonable insurance at reasonable rates. We are very angry at the way in which credit insurance is either nonexistent or very expensive.
“It is a sad state of affairs when an industry that was very bullish and was wanting to sell its policies left, right and centre when times were good now just doesn’t want to know.
“Without credit insurance, a lot of small businesses simply can’t trade. The fault lies with the insurance industry for pulling back so quickly. One day they were there, the next day they were gone.”
At present about one in five businesses in Britain has credit insurance, which typically costs about 0.3% of sales in terms of premiums.
Fabrice Desnos, chief executive of Euler Hermes UK, another big credit insurer, said that in the past five months his firm had seen a large increase in the number of small firms seeking to take out credit insurance for the first time .
“A lot of businesses that didn’t care about it a year ago suddenly think it is a good idea. When we receive such an increase in demand we are rightly being very selective about the types of clients that we think we can accommodate and the type of clients who will buy into our ethos of risk management as well.
“We are not there to swap debts and suddenly be there to pick them up at the worst possible economic time. Sometimes there is some demand that cannot necessarily be catered for because some of the risks are uninsurable.”
Desnos said that the rise in premiums depended on the individual client. The price is determined by their record of claims and the sector in which they are operating.
“Obviously, the construction and property sectors are very difficult, and everything that is linked to the automotive sector is difficult,” he said.
“The experience that we have in terms of claims with a particular client will have a great bearing on the repricing that we will try to enforce.” Desnos pointed out that there had been a substantial increase in the number of claims being made by small businesses, particularly in the second and last quarters of 2008.
The government last week confirmed that it was looking into the possibility of providing some kind of assistance to help more small businesses get access to credit insurance.
The Department for Business, Enterprise & Regulatory Reform said: “We understand the problem faced by companies that rely on credit insurance. It’s important that any intervention allows businesses breathing space to reach new arrangements with lenders and suppliers - while also protecting taxpayers. We are looking carefully at these issues.”
It is understood that one option would be for the government to underwrite 50% of credit-insurance risk in situations where cover would otherwise be withdrawn. An announcement is thought likely in the next couple of weeks.
Daniel Steel, managing director of Esdevium Games, a specialist games distributor based in Hampshire, said that government intervention would be welcomed by small firms such as his.
“Some form of sharing some of the risk would probably have a very beneficial effect. Credit insurance is the oil that keeps the engine running in business,” he said.
“If you don’t have credit insurance, business seizes up. If we didn’t have credit insurance it wouldn’t stop us trading but it would have a significant impact on what we could do. A little intervention could make quite a big difference to a lot of people.”
Steel said that his credit insurer was steadily reducing the limits on the amount of trade that would be covered by the insurance he had, making it difficult to do business with some long-standing customers.
“The problem is that they are having to be cautious and that affects our ability to trade with our customers,” said Steel. “So you get into a downward spiral.”
WHAT IS CREDIT INSURANCE?
FIRMS take out credit insurance to protect themselves against trade customers failing to pay bills. It is particularly important in industries such as construction and retailing, where payment may not be due for up to six months. If a customer goes bust, the credit insurer will pay out an agreed percentage of the money owing.
Before a business starts trading with another firm, the credit insurer will agree a trading limit for that specific company. The insurer may then adjust this limit to reflect changes in trading conditions.
Saturday, February 21, 2009
Springtime for Banks
James Kwak | Feb 21, 2009
Less than a week after pulling off the media coup of publishing his universal credit insurance proposal in both the FT and the WSJ on the same day, Ricardo Caballero has a new proposal for solving the banking crisis, this one in tomorrow’s Washington Post.He should go back to the last one.Here’s the new proposal: “The government pledges to buy up to twice the number of bank shares currently available, at twice some recent average price, in five years.” According to Caballero, this will have the following effects:
Because bank stocks immediately become more valuable, it has a wealth effect that pushes up the value of all assets.
Banks will be able to raise private capital, because they can issue additional shares equal to all of their outstanding shares, and these shares will have a price floor.
Because this will have a stimulative effect and will solve the bank capital problem, the economy and the banking sector will go back to normal, and five years from now the government won’t actually have to buy any shares, because they will be trading above the government-guaranteed price floor.
Let’s start with the most important issue: fixing the banking sector. Caballero’s credit insurance plan would solve this goal, because it involves cheap government insurance for all bank assets. This proposal, by contrast, is a private sector recapitalization plan. Essentially, each bank would be able to raise new capital (by selling shares) equal in value to twice its current market capitalization, because those shares are guaranteed. For Citigroup, that would be about $20 billion. Does anyone think that would be enough to lift the clouds hanging over Citi? JPMorgan, by contrast, could raise about $150 billion. But there’s nothing saying that they have to, and bank managers who think that twice their current share price is still undervalued will have no new incentive to raise capital.
This is especially true because of the perverse incentives this plan creates, which make it especially hard to understand. This plan creates a government guarantee on the stock price. In other words, it says, “No matter how stupid you are, what ridiculous risks you take, and how bad your bank is, we will buy your stock at an artificially inflated level.” Is this really the way to create a healthy banking system? I understand why people are afraid of government control over banks, but this seems at least as bad to me, since it creates an obvious incentive to take excessive risks. In addition, this takes away the usual incentive for raising capital: the need to maintain capital adequacy levels. Now that the government has guaranteed that shareholders will not lose their capital, no matter what, why raise more and split the upside with new investors?
What about the stimulative effect on the economy? Basically bank stocks would double in value overnight. Now, the S&P 500 Financial Sector Index is down about 80% from the summer of 2007; banking stocks are probably down a little more, say 85%, and insurance stocks down a little less. So the day after this plan is announced, your bank stocks - by now a small part of most portfolios - are down only 70% instead of 85%. While this might have some wealth effect, I think it would be relatively small; among other reasons, stock holdings and retirement accounts have a relatively small impact on consumption, compared to wages, dividend and interest income, or even home values (because they can be used for home equity lines). And I don’t see how it could turn around the economy.
Besides, if the idea is to stimulate the economy by making people feel wealthier, the simplest and fairest way to do this is through a tax cut. But the problem with tax cuts right now is that most of the tax cuts will simply be saved. This should be even more true of the Caballero plan, which just makes your banking stocks double in value. And if we are looking for creative ways to make people feel wealthier, what about a government guarantee to buy your house, in five years, for whatever you paid for it? (That was a rhetorical question.)
But, Caballero says, the great thing about his plan is that it is free. Because the plan will turn around the economy and return the banks to normal, the government will never actually have to buy the shares. This is wishful thinking in its most pure form. Yes, it is possible that if we fix the banking system, the economy will turn around, and most of these troubled assets will return to something like their current book values. But in that case, every proposal anyone has offered will turn out to be free. Caballero’s credit insurance plan will cost nothing, because the government will never have to cover any losses. Paulson’s plan to buy toxic assets will cost nothing, because those assets can then be sold for more than the government paid. The nationalize-reprivatize plan will cost nothing, again because the the government can sell the bad assets at a profit. Buiter’s and Romer’s “good bank” plan will cost nothing, because the good banks will be worth more than the capital it takes to set them up. A government recapitalization plan - say, for example, the government buys, at twice the current price, a number of shares equal to the current shares outstanding, will cost nothing, because the government’s new shares will be worth more than it paid for them. (This is similar to Caballero’s plan, except we know that the banks will actually raise capital, and the taxpayer gets the upside as well as the downside.)
But as Martin Wolf put it in a post I’ve recommended before and recommend again, “the heart of the matter . . . is whether, in the presence of such uncertainty, it can be right to base policy on hoping for the best.” That question answers itself.
Saturday, February 14, 2009
Covered by a few extra dirhams
By Safura Rahimi on Saturday, February 14, 2009
With the financial crisis touching an increasing number of lives in the UAE, credit cardholders have been left wondering how to tackle their bulging balances.
It seems credit shield policies – temporary protection plans available on most credit cards – promise to offer a respite. The scheme, which can be activated when applying for a credit card, claims to provide cardholders with the security of knowing they are covered against outstanding credit card balances in case of an inability to pay.
In other words, the bank or insurer will shell out the money to pay the monthly credit card installments in case you get sacked for reasons such as business closure or company layoffs, but not poor performance.
Some will even cover monthly card payments for up to 12 months, or until the customer finds a new job.
But despite the different variations of the scheme offered by UAE banks, reaping the benefits of credit shield is not always simple.
Variations Galore
Some banks don't offer credit cover for at least 30 days after the cardholder reports involuntary job loss. Others only cover outstanding payments if the customer was laid off at least three months after the credit shield activation. And you most likely won't see a dirham if you've only activated the credit shield on your card after being fired from your job.
So the message from banks is, plan ahead. "Activating credit shield post a loss of job is like buying an insurance policy today to cover for yesterday's loss, which is not allowed in any part of the world, as insurance is taken to indemnify one against an unforeseen event," says Zeeshan Saleem, Head of Credit Cards at Barclays.
Saleem says it is simple to claim insurance if you're a customer already enrolled for credit shield and have lost a job. "Insured individual needs to submit a few documents like a notice of termination from the employer, copy of passport with visa page, and copy of the labour contract from the employer to verify the period of employment contract," he says. "The claim can be made only if the credit shield insurance is active or applied for by the customer."
The turnaround time to claim the insurance is about two to three weeks depending on the type of claim. Once approved, the insurance company pays the card's outstanding balance.
The Devil in the Details
Although the programme does offer peace of mind particularly in today's uncertain job market, it's important to read the fine print of your credit shield coverage.
To make a claim, Citibank says cardholders must have been employed for 12 continuous months with the same employer during the 24-month period before the claim date.
The bank also rejects claims from job losses due to misconduct, and from cardholders over the age of 65 from date of unemployment.
"We view Credit Shield as a valuable product that can further protect customers, especially in times like these.
Our approach has been to offer the product to customers in a very transparent way and let them decide on its value to them at certain price points," says William Keliehor, Citi Credit Cards Head for Middle East, Africa and Pakistan.
The credit shield payments stop when the cardholder resumes work or when the maximum benefit payment term of three monthly installments has been reached for any one claim, or six monthly installments in total for several Involuntary Loss of Employment (ILOE) claims during the period of coverage.
While Citibank cardholders insured with credit shield would have their monthly installments covered for each month they remained unemployed, the bank said a claim is turned down if the customer is sacked within the first month after activation of the policy.
"The waiting period is calculated from the first day of ILOE commencement. No benefit is paid for the first 30 days," the bank says. That means if a customer presents a redundancy letter in February, his credit shield, if approved, will cover the monthly due amounts starting from the end of March.
At Mashreq, customers can apply for a claim against credit shield cover immediately but the bank said benefits for involuntary loss of employment are only paid if the customer was laid off at least three months after the credit shield activation.
"However, if the customer has had the policy cover for more than 90 days and has just become unemployed, he can immediately apply for a claim. Hence, it is advisable to sign up for credit shield even if one's job is secure today to cover any eventuality in the future," says Vimal Kumar, Cards Business Head at Mashreq.
Mashreq's credit shield fees are charged on the card's billing date and costs 0.65 per cent of the outstanding balance. "In the current economic environment, it is extremely prudent to cover as much of one's liability arising out of unforeseen circumstances."
The feature gives customers peace of mind to use the credit card freely, without worrying about any unforeseen events in the future, he adds.
In the case of insured cardholders who have recently been sacked from their jobs, Kumar says 10 per cent of the outstanding balance on the card is subject to a maximum coverage of Dh2,500 for Classic and Gold cards and Dh4,000 in the case of Platinum cardholders.
Customers must notify the bank in writing no later than 30 days from the unemployment date to claim the coverage, as well as complete the standard claim form and submit the required documents. Kumar said credit shield will activate within 10-30 days and the amount will be credited to the cardholder's credit card account.
No Job Loss Cover
However, not all banks that offer credit shield cover job layoffs. Emirates NBD offers an 'ultra' credit shield scheme on its credit cards but it does not protect customers against involuntary layoffs. The bank declined to respond to queries from Emirates Business.
HSBC's optional Credit Cover – charged at 0.2 per cent of the cardholder's monthly outstanding – is insurance that protects outstanding balances against death or permanent total disability. However, the bank said it does not cover loss of employment at this point in time.
Saturday, January 24, 2009
Comptroller Chick Slams City’s Take-Home Car Program
by Damien Newton on January 23, 2009
In a city government who's transportation thoughts are directed in writing love sonnets to the private automobile, it should come as no surprise that the city's "Take-Home Car Program" is little more than an entitlement program for our urban rulers. However, following a scathing report by Controller Laura Chick, Mayor Antonio Villaraigosa made some moderate moves to control this out-of-control city program.
Chick blasted the city for not requiring city officials with take-home cars to have the proper insurance, not having a check on officials use of credit cards to purchase gasoline, that city officials are issued cars without meeting the city's written specifications and the boom of take-home vehicles to the LAPD, which has grown by 40% in the last five years.
You may remember that last year Mayor Villaraigosa brought up the possibility of cutting the car fleet and the City Council reacted as though he were proposing to slash pensions for elected officials and foreclosing on their mortgages.
Nevertheless, perhaps Chick's report will bring about some long-term changes in a city program that does more to promote car usage among city employees than any other. The city owns 1,131 vehicles in its take-home fleet, over three quarters of which are owned by the LAPD. While Chick's reccomendations are a great starting point, don't expect her office to go much farther. Last year she defended the City Council's program of rewarding employees with take-home cars as a "perk" that staffers have grown to expect.
Nevertheless, here are Chick's proposals:
Cancel the credit cards. If employees need to buy gas in an emergency, they can submit their receipt for reimbursement.
If City employees can’t produce proof that they have the required insurance, then take the car away. If not, then re-visit the insurance requirements and liability risks to see what makes sense.
Do a cost-benefit analysis of take-home cars vs. pool-cars vs. mileage reimbursement (using existing consultant dollars in the office of the City Administrative Office).
Set clearly-defined criteria as to why a vehicle is assigned to a department and/or an individual
Mayor Villaraigosa lept to work, installing the bare minimum of safeguards on the program and ordering further studies. However, any check on an uncontrolled car program was enough for the Daily News to declare that the Mayor was "putting the brakes" on auto use.
He put a freeze on issuing take-home cars and he suspended purchases of most new city vehicles.
He also ordered officials to verify that those who drive city vehicles have the proper insurance and halted the use of city credit cards to buy fuel at noncity facilities.
While these steps are laudable, what is really needed is a complete overhaul of the city's fleet policies. One proposal, which has been mentioned previousley in Streetsblog, would be for the city to basically end it's take-home program and instead support a car-sharing program that would be available to city employees when needed and the rest of the city residents as well. Already a hit in Philadelphia, the program wouldn't just save the city millions of dollars every year and reduce car dependency of city employees; it would also bring car-sharing back to Los Angeles in a signifigant way, a state goal of Council Woman, and Comptroller candidate, Wendy Greuel.
Last year, during a similar debate on the city's vehicle fleet, Soap Box LA had an alternate proposal: the city should begin hiring local:
The City of Los Angeles could reduce congestion as well as its travel expenses simply by hiring local and encouraging city employees to walk, ride or use transit.
How is it that the Mayor’s first rep to Hollywood lived in Palmdale and commuted to Hollywood in order to represent the Mayor. Are there no people living in Hollywood qualified to work for the Mayor? (No word yet on the new rep)
Hollywood is on the Red Line. If the Mayor sends out the signal, his reps can jump on the Metro and be at City Hall faster than those traveling by single occupant vehicle. (SOV)
Take it all the way through the departments! A City Council motion to requiring the General Managers of City Departments to live in the city has been floating for years with no success. Not even GM’s are required to live in the city?
At one point, LADOT had a GM who commuted from home in San Jose to work in Los Angeles.
How great would it be if City Staff actually walked the same streets, used the same bus stops, shopped at the same stores and could actually relate to the issues of our unique communities from the inside, not just from workshops and discussions and hearings.
Whether the city decides to hire local, promote car sharing, or push some other means, if it is serious about controlling this out of control program, that it could provide alternate transportation for city officials used to this "perk." If Villaraigosa's steps yesterday are the end of the story, we can file the Chick report away as another missed opportunity for the Car Culture Capital of America to join 21st Century transportation policy.
Photo: Dugm2/Flickr
Subscribe to:
Posts (Atom)