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Global California Conference
EXPORT CREDIT INSURANCE
A TRADE FINANCE TOOL FOR EXPORTING
DURING THE ECONOMIC DOWNTURN
PRESENTEDAPRIL 2009
BY GARY MENDELLMERIDIAN FINANCE GROUP
Amidst the challenges in the world’s present economic situation, there are also opportunities for growth. The
global financial crisis is not affecting every sector of the real economy. Many companies will continue to grow and in many cases their growth will come from export sales.
While total export volumes may fall short ofearlier projections, worldwide marketdemand for goods and services will continueto engender a considerable amount ofinternational trade, and even expansionin some sectors.
Exporting in the Economic Downturn
The U.S. economy is projected to continue declining for some
time before it begins to recover, but with just five percent of
the world’s population and less than one-quarter of global
GDP, the U.S. is not the only country with purchasing power.
While all countries are linked to some degreeby economic interdependence, different cultural,political, and market forces will lead Europe,Asia, Latin America, and other regions eachon their own trajectory.
Purchasing Power in Other Countries
Facing limited access to capital in their own countries, as well as high interest rates and exchange controls, foreign companies are turning to their international suppliers for working capital in the form of longer payment terms.
Exporters who seek to capitalize on the opportunities that will emerge in 2009 and beyond need to consider extending competitive credit terms to their international customers:
When customers refuse to pay cash in advance or L/Cs As a competitive tactic vs. other suppliers To support distribution /representation For inventory transfer/supply chain benefits And to keep doors open in strategic markets
Customer Demand for Credit
U.S. exporters need to extend competitive credit terms to
maintain/grow their international sales, but what happens
if they don’t get paid? Non-payment risks include: Customer bankruptcy, receivership, or insolvency Protracted slow payment for any number of reasons Cash flow problems or balance sheet issues Over-anticipated demand or local competition General economic conditions (there or in USA) Currency fluctuations Foreign exchange/transfer controls Expropriation and other political risks War, strikes, embargoes, trade sanctions
Export Credit Risks
Exporters can protect their foreign receivables and be con-
fident of getting paid with an export credit insurance policy.
Export credit insurance protects exporters against the com-
mercial and political risks of not being paid by a foreigncustomer for virtually any reason.
The benefits of this coverage include:
Risk protection on foreign receivables Increased international sales Higher exporting profits Enhanced borrowing capacity
Export Credit Insurance
All of an exporter’s foreign receivables can be insured under a
multiple-buyer policy, or single-buyer cover may be available.
Sales of all types of products can be covered, regardlessof content or where the products are manufactured.
Foreign customers don’t need to be huge corporationsor government agencies; any buyers can be consideredas long as they are creditworthy . . . as determined byfinancial information, trade references, or in some casessimply the exporter’s own credit experience.
Domestic coverage is also available,either alone or in combination withexport credit insurance.
Eligibility & Spreads of Risk
Premium rates are based on the terms extended, the spreadof buyer and country risks, and the exporter’s previous creditexperience. The cost is low, typically a small fraction of onepercent based on sales volume . . . in most cases much lessthan the fees charged for letters of credit.
Rates may be calculated as a function of shipmentvolume, country and buyer credit limits, or outstandingreceivables. Premiums are payable monthly or annually.
Whether or not this incremental expense ispassed on to foreign customers, the price ofthe coverage is insignificant compared to theadditional business to be won by extendingcompetitive international credit terms.
How Much Does Coverage Cost?
Some insurance companies perform their own creditinvestigations and analyses of buyers, individually underwriting each foreign buyer for the exporter.
Others entrust, and even rely upon, the experience and expertise of the exporter to make its own credit
decisions,either on the basis of the exporter’s own review of thebuyer’s credit information or its own ledger experience.
Some insurance companies have developed their own databases of foreign companies’ financialinformation; others depend upon the exporterto provide the information on which theirunderwriting decisions will be based.
Export Credit Decisions
Trade supplier credit references Credit agency reports Financial statements Bank references Industry-specific creditor groups Specialized industry resources Personal visits Time in business Local reputation On-line, legal, news-wire info Juxtaposition of all of the above
Sources of Credit Information
Policies are structured so claims may be filed on the basis of
either shipments or losses which occur during the policy term.
Some policies allow claims to be filed as soon as a buyerdefaults on payment, while others specify a waiting
period.
Most kinds of coverage provide for an extended period oftime during which, if the exporter so chooses, it can try
andwork with past-due customers before claims must be filed.
Exporters’ collection efforts can often becoordinated with the insurance company.
Once a claim is paid, receivables from thebuyer get assigned to the underwriter.
Claims
Legal/enforceable documents can reduce non-payment risks and may be critical for effective collections. Bilingual documentation should always be reverse-translated.
Cash down-payments, partial deposits, and standby letters of credit can of course obviate default risks, but creditworthy buyers may not be prepared to offer them.
Documentary collections, promissory notes, drafts, or bills of exchange may enhance collection efforts. They do not necessarily reduce underlying credit risk.
U.S. accounts, post-dated checks, direct remit- tances only as good as buyer performance.
Other Ways to Mitigate Risk
INCREASES PROFITS: Helps to grow sales by making it more economical for customers to purchase larger quantities; enables negotiation of better pricing from suppliers; facilitatestransferring inventory carrying costs to foreign distributors.
SUPPORTS MARKET PENETRATION: Allows openingof new target markets which might otherwise be perceivedas too risky for extending competitive credit terms.
GETS MORE OUT OF DISTRIBUTORS:Enables negotiation of stronger representationby offering competitive terms to distributors;keeps more products in the supply chain,increasing market share and brand recognition.
Coverage as a Sales Tool
ENHANCES BORROWING CAPACITY: Facilitates the arrangement of favorable financing by making foreignreceivables more attractive to banks and other lenders. Theexporter can assign policy proceeds to its bank.
STRENGTHENS BALANCE SHEETS: Keeps a company’sfinancial position secure, despite exposure to unforeseenevents, concentrations of credit risks, and changing inter-national market conditions. Insuring foreign receivables
may also enable reduction of bad debt reserves.Export credit insurance can help facilitate the“true sale” of receivables per FASB 140, aswell as supporting asset securitization.
Coverage as a Financing Tool
TRADE FINANCE Cross-Border Equipment Financing Foreign Buyer Credit Facilities Note Purchase Agreements Custom Financing Structures
INSURANCE Export Credit Insurance Political Risk Coverage Domestic Receivables Insurance Policies for Financial Institutions
Meridian Finance Group
Meridian Finance Group
1247 7th Street, Suite 200Santa Monica, CA 90401
Tel: 310 260 2130Fax: 310 260 2140
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