Eurofactor Intelligente Finanzierungslsungen

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Debtor Risk Control
IFG Risk Management SeminarBerlin, 28th of
April 2009
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Agenda

• Characteristics of debtor credit limit
• Credit limit process
• Debtor risk coverage
• Direct
• Indirect
• Aspects of credit insurance
• Specific cases
• Structural / procedural debtor risk
• Retention of title
• Handling of debtor insolvency

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10.11.2009
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Characteristics of debtor credit limit

• Revolving credit limit which is the base of the
  funding of receivables
• Basis of Non Recourse Factoring agreement
• Protection against bad debts to 100
• In case of debtors inability to pay, Factor is
  obliged to pay the full purchase price (90-120
  days after due date) to the seller
• Credit limit covers existing and valid
  receivables (shipments, deliveries made /
  services performed)
• Principle of succession if receivables are partly
  approved
• Conformity with terms of payment
• Cancellations are valid upon receipt of such
  notice (delivery which has taken place before
  notice of cancellation is covered)

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Credit limit process
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Debtor risk coverage (without credit insurance)

• Direct debtor risk coverage
• Assessment of clients debtors before signing a
  factoring contract
• Regular assessment of debtors after signing a
  factoring contract
• Assessment based on different information sources
• Credit information agencies (DB, Creditreform,
  Bürgel, etc.)
• Bank information / Reports
• Identification numbers (Sirene, VAT etc.)
• Balance sheet / monthly Profit Loss statement
• Rating / Grading (by credit insurance or rating
  agency like Moodys, SP, etc.)
• Press / Online publications
• Receivables ledger of factoring client
• Internal information sources (payment history,
  dunning status, etc.)
• Credit limit decision
• Credit limit with expiry date or
• Credit limit until further notice or
• Rejection of credit limit

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Indirect debtor risk coverage (reinsured)

• Via credit insurance
• 1-contract model (debtor risk coverage by credit
  insurance contract of Factor)
• 2-contract model (1 factoring contract and 1
  separated credit insurance contract of client)
• Factor accepts own credit insurance contract of
  his client
• All rights of the credit insurance (CI) are
  assigned to the Factor (CI has to agree)
• Obligations of the CI contract can be fulfilled
  either by client or Factor
• Factor normally covers the self retention (of
  10-20) in order to provide true sale
• Currency risks to be considered
• Through 2-Factor agreement via IFG
• Risk assessment by Import Factor
• 100 Risk protection
• Payment under approval 90 days after due date
  (according to GRIF)

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Credit risk coverage via CI

• Important aspects in a CI contract
• Self retention percentage withhold from CI per
  bad debt case, usually 10-20
• Franchise individual fixed amount per bad debt
  withhold from CI
• First loss fixed amount up to which the CI is
  not obliged to pay indemnification
• Payment period for indemnification
• a) when insolvency proceedings have been opened
• b) protracted default earlier indemnification
  period, usually 180 days after due date
• Max. indemnity limit limited amount up to which
  indemnity is totally paid (per policy period),
  generally a multiple of paid insurance premium
• Covenants Information of CI (within defined
  period) about overdues, bad financial
  information, bad debts, payment of insurance
  premium

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Cancellation of credit limit

• After information of CI
• Earlier cancellation, if for example
• Negative payment behaviour
• Increasing overdues
• Request for installments
• Deterioration of grading
• Bad financial information
• Negative development in certain industries
• CI covers debtor risks, but if bad debt ratios
  exceed 70-80 of paid premium
• Increase of insurance premium, if claims are
  exceeding defined ratios
• Downgrade of debtors and cancellation of credit
  limits
• Tightening of insurance terms (i.e. higher first
  loss, franchise, etc.)

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Specific cases

• Debtor is also client
• Increased risk profile
• High solvency requirements
• Reverse Factoring
• 100 debtor concentration
• High solvency requirements
• Accumulation of credit limit amounts
• Undisclosed Factoring / NNF
• No direct contact to debtor
• Risk of fraud
• High solvency requirements
• Central regulation service

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Central regulation serviceCollision with
factoring

• Typical aspects of central regulating agreements
• Central clearing of all receivables and setoffs
  of companies that are member of a central
  regulating association
• Optional guarantee against bad debts by central
  regulating company
• Debtors pay normally with full discharging effect
  to the central regulating company
• Consequence

Collision
Supplier assigns its receivables to Central
Regulating Company.
Supplier receives funding from factoring company
based on sold and assigned receivables.
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Central regulation service Solution 3-party
Agreement

• If receivables are assigned to Central
  Regulating company prior to the Factor, Factoring
  is only possible through a 3-Party Agreement
  between the Factor, the Client and the Central
  Regulating Company
• The priority of receivables assignment to the
  factoring company is accepted by the central
  regulating company
• The central regulating company pays only to the
  factor
• The assignment of the rights on debtors payments
  to the factor is accepted by the central
  regulating company
• In return factor accepts the central regulating
  conditions, particularly set-off rights
• Measures by the Factor
• Assessment of receivables assignment to Central
  regulating company (with focus on date of
  assignment)
• Clarification which party has to be risk covered
  (Central regulating company or associated buyer)
• Consultation on signing credit limits between
  credit and legal department
• Regular audits of all relevant clients
  contracts, terms, invoices and adherence of
  covenants

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Central regulation serviceFactoring with central
regulating companies
Factoring contract
Factoring Company
Supplier
2.b Funding of receivable
2.a Sale and assignment of receivable
3.b Assignment of rec. at time of payment
3.a Settling payment at due date
3-party agreement among F, S and CRC
1. Delivery of goods
Supply contract
Central regulating contract Guarantee by Central
Regulating Company
Payment with full discharge of debtor
Central Regulating Company (CRC)
Debtor
Agreement of Central Regulation
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Structural / procedural debtor risk
Example of debtor risk portfolio

• Debtor analysis
• Regular analysis of industry sector
  concentrations
• Regular analysis of share of top debtors in
  proportion to total portfolio
• Rating of debtor groups (based on consolidated
  figures)
• Analysis of country risk

• Typical industry risks
• Industries in which partial payments are usual
  and the full payment of the receivable is
  dependent on the satisfying completion of an
  individual work (i.e. Construction, plant
  engineering, production of machinery, classis
  project business, software development)
• With high potential of disputes (i.e. textile,
  leather)
• With payment of installments over a longer period
  (i.e. renting, leasing)
• With strong changes in resource prices/ market
  conditions
• In which rights of return are usual (i.e.
  newspaper, CD, computer games)
• In which debtor is liable for unpaid social
  insurance contribution in case of
  suppliers insolvency (i.e. temporary employment)

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Handling of debtors insolvency

• Liquidator
• Appeal against debtors payments to the Factor
• Repayment demand against Factor
• Measures of Factor
• Extensive incorporation of Retention of
  title-rights into terms and conditions of
  suppliers contracts (before signing a factoring
  contract)
• Protection of suppliers rights to separate or
  segregate receivables out of debtors insolvency
  assets and transfer them to the Factor
• Retention of title (Goods in possession of
  debtor)
• Extended retention of title (Goods processed or
  compounded by debtor)
• Prolonged retention of title (Goods sold on by
  debtor rights on receivables assigned to
  supplier until payment)
• Participation on suppliers pool (with regard to
  prolonged and extended retention of title)
• Segregation of claimed goods out of debtors
  insolvency assets to Factor or
• Payment of claimed goods actual value to Factor
• Measures in Export
• 2-Factor-System (Importfactor covers risk of
  debtors insolvency)
• Direct Export-Factoring
• Retention of title is known and allowed in most
  countries

Before debtors insolvency
During insolvency process
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Retention of title
Retention of title
Prolonged Retention of title
Supplier
Buyers debtor
Buyer
Goods
Goods

• Supplier remains owner of delivered goods, until
  Buyer has paid

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Preparing measures in the insolvency
processExample Germany

• File for insolvency

• Preliminary insolvency proceedings
• (Debtor usually acts in coordination with
  preliminary liquidator)

• Claim retention of title-rights against debtor
  and inform preliminary liquidator

• Expertise of insolvency assets

• Rejection of file for insolvency due to lack of
  assets
• Debtor exists until liquidation
• Liquidation by law of debtor in the companies
  register
• Collection impossible as no assets are realizable

• Opening of insolvency proceedings
• Liquidator is appointed (acts alone)
• Liquidator continues debtors business
• Information of all creditors
• Creditor claims can be lodged to the insolvency
  list
• Factor lodges creditor claims and
• asserts retention of title-rights

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Contact
Eurofactor AG Bajuwarenring 3 D - 82041
Oberhaching near Munich Roberto Weckop Director
International Marketing Member of Board of
Directors Tel. [phone] Fax 49 89
959095-109 Roberto.weckop_at_eurofactor.de