Credit insurers and banks learn to work together

Regular

posted 29 Nov 2006 in Volume 10 Issue 2

Trade finance practitioners sometimes show surprise when they are first told that Coface is a subsidiary of Natexis Banques Populaires, and has been since 2002.

In truth, the focus has so far been on making sure the relationship works well from a corporate perspective. Yet, increasingly the synergies between the bank and insurer are being explored, especially in the UK.

Of course, Coface UK offers its credit insurance products to the whole UK market, and Natexis expects no preferential treatment. Also, both observe strict confidentiality requirements and remain legally separate entities – each engaged in different sectors and with ‘Chinese Walls’ between them. Yet, cooperation between the two entities is on the increase and is providing synergies that reveal new potential models for risk mitigation in trade finance – not just between a parent and subsidiary.

A key area of emerging cooperation is to jointly assist corporate clients to find the right mix – a package that can include credit information on buyers, funding, cover against non-payment and receivables management. Of these, funding is vital. A recent example is the solution provided by Coface for European Colour. The company was finding it difficult to expand outside of its traditional UK, European and US markets. To solve this, Coface UK offered a flexible, receivables finance service that allowed it to break into South America. Coface UK’s collection skills in the region were an important extra benefit.

However, the roles can be reversed. With the January 2007 implementation of Basel II looming, capacity and credit quality are becoming important issues for banks. Certainly this is the case at Natexis – and the support from a credit insurer makes a difference in this respect. Indeed, as a bank, we are increasingly looking at Coface UK as a risk-sharing partner on specific deals – not least because the insurer’s knowledge of the small to mid-cap sector is extensive.

The capacity of banks to disburse funds is being greatly tested by the substantial rise in supplier credit and the urgency with which companies need such finance. And revolving credit lines are usually set up after a thorough analysis by banks and secured against assets or future cash flows. However, a bank’s lack of knowledge of its clients’ debtors can lead to credit difficulties, which can be relieved by the credit assessment and cover provided on buyers by insurers such as Coface – something all banks can benefit from, not just the parent.

Given the tighter risk parameters being imposed on banks by Basel II, clients can make the most of a credit insurer’s services to insure their debtors and subsequently assign the insurance policy to their bank – allowing the latter to provide finance. In such a case, the bank would have secured part of its risks on the credit insurer, thus creating capacity for other types of funding.

A credit insurer’s ready access to credit information can also help its clients looking to move into emerging markets where information on political risk is vital. Whereas previously, a lack of information could act as a barrier to entry for companies attempting to do business in non-traditional markets, Coface UK now provides Natexis with the possibility of covering political risk at a reasonable price – a definite advantage given the integration of global markets and, more specifically, the expansion of the European Union eastwards.

This can also lead the bank and insurer to work together to structure more complex transactions, for example on receivables deals.

Another potential area of cooperation between bank and insurer is invoice discounting and the issuance of sureties. The insurer’s expert knowledge of buyers (and in particular the support it can give to exporters) means it can provide an invoice discounting service to its clients given its ability to access funds from the bank – enabling the client to obtain funds for its working capital directly from the credit insurer.

In this respect, working with Coface UK enables Natexis to remove certain risks from the bank’s balance sheet. The same logic applies to sureties, with the bank transferring bonds to Coface UK to liberate space on credit lines. Although banks are slowly moving back into the surety market, the advantages of such a rapport are clear – the client can win access to more finance from the bank while the risk has been transferred to the credit insurer.

Certainly it is clear that the role of the credit insurer is no longer confined to dealing with transactional risks – something that is the case beyond Coface and beyond the proactive relationship Natexis is developing with its subsidiary.

Rodney Ballard is head of global trade services at Natexis Banques Populaires in London