Agenda

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(No Transcript)
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Agenda

• Trade credit insurance
• Trade and trade risk in Asia
• The Asian credit insurance market
• Buyer risk assessment
• Links with financing

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About Euler Hermes

• Specialist credit insurance and receivables
  management arm of Allianz Group.
• Listed on Paris stock exchange rated A by SP.
• Largest credit insurer worldwide 37 global
  market share.
• Presence in 39 countries.
• Principal activities Credit insurance,
  management and financing of trade receivables
  (including factoring and securitisation), bonding
  and guarantees.
• Administer the Federal state export credit scheme
  on behalf of the German government.
• Currently protect USD 600 billion of global
  business transactions.
• 6.5 million current credit limits.
• 40 million companies monitored in Euler Hermes
  database.

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Trade credit insurance

• Commercial trade debts typically 10-30 of the
  balance sheet.
• Protects the supplier (the insured) against
  non-payment of trade debts by its customers.
• Provides three key roles prevention,
  collection, insurance
• ? more than merely risk transfer.
• Not a typical insurance product
• no blanket coverage
• highly interactive
• closer to banking products than to standard
  insurance.
• The manufacturer / supplier (creditor) is the
  policyholder.
• The customer (debtor) is the risk.
• Coverage falls into two broad categories
  commercial risk and political risk.

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Insured risks

• Commercial Risks
• insolvency (or equivalent in local jurisdiction)
• default of a Promissory Note
• Protracted Default (non-payment at 180 days
  past due).
• Political Risks
• currency inconvertibility
• war, civil war, insurrection
• contract cancellation
• exchange transfer delay
• cancellation or restriction of export/import
  license
• public buyer cover.

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The global credit insurance market
World market shares World market size
Estimated credit insurance global market
volume USD 4.3 billion (direct premiums and
related fees based on declarations by ICISA
members)
Total market USD 4.3 bn
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Questions and issues facing Asian trade

• General decline in credit quality.
• Divergence of accounting rules and standards.
• Pressure on banking systems squeezing
  availability of finance.
• Increasing obligation to act on a global scale
  must be reflected in risk management programmes.
• Scale and speed of change of risk exposure.
• Bankruptcies inevitable and have happened to big
  name companies.
• Failures come from increasingly unpredictable
  sources.
• Should the rating agencies have predicted
  high-profile failures?

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Characteristics of Asian trade credit

• Use of promissory notes widespread in some
  markets, e.g. Korea, Japan.
• Use of L/Cs declining in face of competitive
  pressures.
• Regulatory and insolvency frameworks vary widely.
• Corporate insolvencies rising, but comparisons by
  country difficult.
• Increasing focus on trade risks, in particular
  credit risk.
• Means of managing and hedging credit risk
  becoming more prevalent (factoring, invoice
  discounting, credit insurance, ).
• Credit insurance previously the remit of state
  ECAs.
• Protection often available only for export trade.
• Export and domestic coverage now more widely
  available.

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The credit insurance market in Asia

• Hong Kong, Singapore fully open markets.
• Taiwan, Thailand, Philippines offshore
  insurance permitted but detrimental tax position.
• China export coverage solely via Sinosure
  domestic entrants now emerging. Massive potential
  demand.
• Korea export and domestic both
  state-controlled emergence of various
  state-private partnerships. High demand, but
  outlets limited.
• Malaysia both domestic and export cover from
  state, MECIB domestic cover may be reinsured
  offshore.
• India partially open market various private
  market players in addition to state ECGC.
• Indonesia effectively a closed market licenses
  prohibitively expensive. Limited demand.

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Buyer risk assessment

• Core principle of credit insurance.
• Involves the assessment and continuous monitoring
  of buyers financial risks in terms of their
• financial performance business / sectoral
  sensitivity
• shareholders industry trends
• competitive outlook adverse information
• growth prospects ...
• Requires proximity to the risk.
• Mix of manual and automatic underwriting, based
  on internal models of risk gradings.
• Manual underwriting for large, high-risk or more
  complex decisions.
• Mix of public and proprietary information.

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Sources of information
Payment experience from policyholders
Information of overdues from policyholders
Companies Registrars
Collections
Claims
Agent knowledge information
Public information
Country underwriters visits
Information agencies (Experian, DB, Graydon, )
Underwriting database
Underwriters trade industry knowledge
Rating agencies (SP, Moodys, Fitch, )
Underwriters visits to clients debtors
Banks
Chambers of Commerce
Localised risk management
Industry economic analysis
Other credit insurers (ICISA)
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Sources of information
Payment experience from policyholders
Information of overdues from policyholders
Companies Registrars
Collections
Claims
Agent knowledge information
Public information
Country underwriters visits
Information agencies (Experian, DB, Graydon, )
Underwriting database
Underwriters trade industry knowledge
Rating agencies (SP, Moodys, Fitch, )
Underwriters visits to clients debtors
Banks
Chambers of Commerce
Localised risk management
Industry economic analysis
Other credit insurers (ICISA)
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Links with financing

• Credit insurers have worked closely with
  financial institutions for decades.
• Private market insurers developing new ways of
  working with banks.
• Credit insurance enhances the quality of trade
  receivables.
• Main driver for credit insurance purchase in Asia
  is to access finance.
• Assignment of claim payments to bank provides
  bank with increased security, allowing client
  greater capacity to access funds.
• Participation in more complex finance structures
• Structuring of trade debt financing solutions,
  such as credit insured non-recourse factoring /
  invoice discounting.
• Participation in wholesale trade debt financing
  structures.
• Securitisation of receivables.

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Securitisation

• Asset-backed securitisation (ABS) using trade
  receivables as the underlying asset.
• Developed in US and Europe, but beginning to see
  signs in Asia.
• Allows company to raise capital based on
  securitised assets.
• Purely finance-driven risk transfer with no risk
  mitigation.
• Insurance provides credit enhancement.

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Securitisation

• 1. Company sells its invoices to a Special
  Purpose Vehicle (SPV).
• 2. Company takes credit insurance alternatively,
  SPV takes insurance.
• 3. SPV issues bonds that are backed by insured
  receivables as underlying asset receivables are
  enhanced by insurance.
• 4. Investors buy bonds for cash. Bonds are made
  more attractive to investors because of credit
  insurance security.

5. SPV pays seller for receivables with proceeds
of bond issue. 6. Seller transfers money to SPV
when buyer has paid. 7. SPV pays a dividend and,
eventually, the principal to investors.
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Questions
9/F, One International Finance Centre 1 Harbour
View Street, Central, Hong Kong Tel. [phone]
0061 Fax [phone] www.eulerhermes.com Eul
er Hermes, a company of the Allianz Group
Matthew Ellerton Business Development Manager -
North Asia Direct (852) 2867 0097 matthew.ellerto
n_at_eulerhermes.com