Kentucky Treasury Management Association February 2013 Presenter: Nick Fow Euler Hermes Overview of Global Trade Receivable Management and Insurance Solutions
Agenda 1. Corporate Credit Management and Credit Insurance Overview 2. The Euler Hermes Group 3. Trade Credit ditinsurance Benefits 4. Benefits Summary and Questions Q & A 5. Appendix Case Studies 2
Managing Trade Receivables Risk What isa receivable? Promise to pay No confirmed value Due to its liquidity, generally not viewed as carrying much risk How do most companies mitigate trade risks? Leverage knowledge of customer base and payment history to monitor and evaluate credit risks of current customer base Monitor aging daily and keep in constant communication with slow pay customers Utilize credit application data, trade references, merc. reports (D&B), and financials (rare) to establish credit for new accounts Credit personnel manage the expected risks by establishing cost of doing business reserves that range from 1 3% of AR Most companies with annual revenue of $10M $500M/yr $500M/ have minimal staff responsible for monitoring and evaluating credit Only reactive, not proactive Where does the A/R fall on most companies balance sheet? Typically represents at least 35% of a company s assets Generally is one of the largest assets on a balance sheet Only uninsured asset (Property, Equipment/Machinery, Inventory, Cash, Executives, all insured) Provides cash flow for the business Most vulnerable to unexpected losses 3
Business Credit Insurance Overview Credit Insurance 101 Credit insurance is a casualty commercial insurance product that protects a company against unforeseen bad debt losses due to commercial and/or political risks. Globally credit insurance is a $7 Billion / year industry The % of companies that use credit insurance in the USA has doubled in the last 10 years #1 Reason companies become insolvent is a lack of cash flow, which is often spurred by a sizable bad debt loss in a concentrated account Credit Insurance A Part of Sound Risk Management Strategy Most businesses have credit personnel that manage the expected risks of bad debt losses Most businesses carry reserves for costs of doing business losses no plan in place for catastrophic losses Manage Expected Risk GOOD DECISIONS Information Your Credit Expertise Manage Unexpected Risk PROTECTION Insurance Self-Insurance Credit Insurance is not intended to replace a credit department, rather to be used as a tool to enhance a company s credit decisions and to protect a company against unexpected bad debt losses that can significantly impair cash flow and profitability How does it work?
Business Credit Insurance Overview Example The Company A sells widgets to a manufacturer we will call Company B. Company A insures their accounts receivable with Euler Hermes. Company B is a new client of Company A. They have just ordered goods from Company A for a total of $100,000 on net 30 terms. Company A verifies with EH that Company B is insurable for a credit limit of $100,000. Should Company B become insolvent or slow/no pay Company A, Euler Hermes would step in and pay Company A for the widgets sold to Company B.
Agenda 1. Corporate Credit Management and Credit Insurance Overview 2. The Euler Hermes Group 3. Trade Credit ditinsurance Benefits 4. Benefits Summary and Questions Q & A 5. Appendix Case Studies 6
Euler Hermes The Global Leader in Trade Credit Insurance Global leader in credit insurance 20,000000 55,000 Clients worldwide 91% of credit limit requests 2.27 billion EUR Consolidated turnover Credit limits requests received per day 200,000 Debt collections handled in 130 countries 100 million EUR Spent on Business Intelligence Annually processed in less than 48 hours 702 billion EUR Business transactions protected worlwide 6,000 + Staff worldwide 45 + million companies monitored in risk database
Extensive Global Presence to Support Global Growth Presence in over 50 countries across 5 continents Argentina Germany Morocco Slovakia Australia Greece Netherlands South Africa Austria Hungary New Zealand South Korea Bahrain Hong Kong Norway Spain Belgium India Oman Sweden Brazil Canada Chile China Colombia Czech Republic Denmark Finland France Indonesia Ireland Israel Italy Japan Kuwait Luxembourg Malaysia Mexico Philippines Poland Portugal Qatar Romania Russia Saudi Arabia Singapore Switzerland Taiwan Thailand Tunisia i Turkey United Arab Emirates United Kingdom United States Vietnam
Agenda 1. Credit Insurance Overview 2. The Euler Hermes Group 3. Trade Credit ditinsurance Benefits 4. Benefits Summary and Questions Q & A 5. Appendix Case Studies 9
Euler Hermes Partnership Euler Hermes enables companies to optimize their management of trade risk and capitalize on business growth opportunities around the world We protect companies trade transactions We offer customized solutions to manage trade receivables including credit insurance and trade debt collection We provide superior business intelligence to develop your business safely 10
Trade Credit Insurance A Closer Look 5 Key Benefits 1) Sales Expansion NO MORE RESTRICTED SALES: Increase incremental growth opportunities with existing customers by safely extending more credit SAFESALES SALES EXPANSION THROUGH NET TERMS: Mitigate t the risk ikof expanding sales into more volatile or new markets, both domestically and internationally FOCUSED PROSPECT TARGETING BY PROACTIVE REVIEW OF SALES FUNNELS: Enhance internal relationships safe profitable cooperation between sales and credit functions STAY AHEAD OF THE COMPETITION BY OFFERING THE BEST TERMS: Increaseability ability tooffermorecompetitiveoffer terms (openaccountvs vs. restrictive terms like LC/CIA) attracts export customer base. ROI: Credit insurance policy often pays for itself through sales expansion
Trade Credit Insurance A Closer Look 5 Key Benefits 2) Improve Financial Monitoring and Operational Efficiency CREDIT INSURANCE AS A CREDIT TOOL: Strengthen structure and discipline for credit decision making BUSINESS INTELLIGENCE: Improve credit risk intelligence using unparalleled third party evaluations of prospective customers, industries and countries. ACCOUNT MONITORING: Installs on going and consistent key account analysis, monitoring, and back up support for their credit management program Eye in the Sky EULER HERMES PARTNERSHIP: Increase leverage over troubled accounts by utilizing insurer s expertise and global resources Leverage our name and presence for debt collection
Trade Credit Insurance A Closer Look 5 Key Benefits 3) Financing Strengthen Lender Relationship ENHANCE BALANCE SHEET AND INCREASE LINE OF CREDIT: Improve a company s borrowing power and increase available capital by converting receivables into a performing asset ELIMINATE CONCENTRATION ISSUES: Reduce lender s concern over account concentration INCLUDE FOREIGN RECEIVABLES: Enable eligibility of foreign receivables KEEP PERSONAL FINANCES SEPARATE: Decrease the need for personal security requirements personal guarantees, etc. 4) Bad Debt Reserve Reduction REDUCE BADDEBTRESEVEDEBT RESEVE: Rd Reduce a company s bad bddbt debt reserve and shift the reduction into profit column or enhance another budget TAX DEDUCTION: Convert that balance sheet line item into a tax deductable business expense 13
Trade Credit Insurance A Closer Look 5 Key Benefits 5) Catastrophic Loss Prevention and Cash Flow Protection PROTECT YOUR BUSINESS INSURE ALL ASSETS: Prevent disruptive losses to one of company s largest, unprotected assets Sleep better at night knowing you will be paid PROTECT CASH FLOW: Safeguard revenue stream from bad debt loss due to unforeseen non payment, slow payment or insolvencies due to commercial and/or political risks; assuring continuity of business operations. IMPROVE CASH FLOW: Improve timely collection of receivables, lowers DSO and strengthens cash flow CAP EXPOSURES TO BAD DEBTS: Smooth financial results over the business cycle unlike an allowance for doubtful accounts Better predictor for annual losses FACT: 50% of all large credit account failures come from long term established accounts 14
Assistance in Globalization: Export Specific Credit Insurance Provides an organization with a platform to expand internationally Euler Hermes takes the fear out of sales expansion Eliminates Need for Letters of Credit Covers shipments for the year Open terms allows the buyer to keep their working capital line of credit available for other uses Fear of doing business in foreign countries where business practices, laws, and political risks are unknown Competitive Edge Offering open terms The difference in winning business or retaining from competition? Borrow Export Receivables are no longer non performing assets Recognized collateral that can open up opportunities for better financing Political Risk Export protection Inability to obtain hard currency Changes in Import/Export regulations Foreign government non payment
Agenda 1. Credit Insurance Overview 2. The Euler Hermes Group 3. Trade Credit ditinsurance Benefits and Products 4. Benefits Summary and Questions to ask your Clients Q & A 5. Appendix Case Studies 16
Who Can Benefit from Credit Insurance? Any company that sells to other businesses on short term term credit terms (up to 360 days) Concentration of trade receivables Thin profit margins Growing sales due to market expansion and/or merger/acquisition Export sales Minimal credit staff Manufacturers, wholesalers, distributors, and service providers with annual domestic or export sales of $3 million or more. Broad range of target industries including but not limited to: Machinery and Equipment Metals Pharmaceuticals Food Technology/Computers Electronics Chemicals Energy/Oil & Gas Transportation Telecommunications Packaging Apparel Consumer Goods 17
Benefit Summary Credit Management Solutions EDUCATE! Help your Client Expand Sales Globalize! 1. Expand sales to new, unknown or higher risk customers and new markets to which sales are currently restricted. Credit insurance is a tool to SAFELY increase sales. ASK Are there any new or higher risk customers to which they are restricting sales? ASK If your client has not had bad debts over the last few years, ask if they have lost sales because of overly conservative credit approaches? 2. Expand export sales by selling on less restricted payment terms (no need to require CIA or Letters of Credit) ASK Does your client have export sales? If so, which countries and under what payment terms? If not, have they thought of considering expanding into new markets? ASK Could selling on open account terms place them in a more attractive competitive position and improve their sales? 18
Benefit Summary Credit Management Solutions EDUCATE! Complement Credit Management Function 1. Euler Hermes Partnership with Credit Management ASK Do you know how your client manages their AR? ASK Does your client struggle with credit management, bad debts, time management, credit personnel turnover? 2. Access to Risk Management System, Analysts and Evaluation Intelligence ASK Which sources does your client currently utilize in their credit process (D & B, Experian, nothing?)? ASK How well does your customer know their customer base and their customer s s customer base? Do they evaluate potential exposure to failures in the supply chain that may adversely impact your customer s ability to pay? 19
Benefit Summary Credit Management Solutions EDUCATE! Strengthen Your Client s Lending Relationship 1. Improve accounts receivable margining. ASK Does your client pledge their receivables as collateral? What is their advance rate? ASK Do they export products? Would ldthey be interested t din a way to include foreign receivables in their lending base? ASK Do they have concentration challenges that impact their borrowing ability? 2. Reduce cost of borrowing ASK Is your clients line of credit substantially used at this time? Do they need access to more capital? 3. Reduce bank security requirements ASK Does your client provide a personal guarantee to their bank? Do they feel significantly over secured at your bank? 20
Benefit Summary Credit Management Solutions EDUCATE! Reduce Credit Risk and Improve Financial Planning 1. Strengthen the balance sheet and safeguard sales and gross margin. The lower the gross margin percentage, the more sales and production required to replace a bad debt. ASK What amount of loss would seriously hurt your client s financial stability or yearly profit? How many accounts are over this amount? ASK What percentage of total or current assets does your client s accounts receivable represent? 2. Secure the company cash flow and avoid the domino effect a large portion of business failures are directly attributed to uncollectible accounts that cause a severe negative impact on cash flow 3. Reduce bad debt reserves and free up working capital to be invested more productively
Credit Insurance: The Solution for A Company s Business Development Identifying the need: Questions What is your client s credit philosophy? h? How frequently do your clients deal with insolvencies/bad debts in their customer base? Do your clients struggle with international sales expansion plans? Do your clients regularly sell to new customers & markets bothdomestically and internationally? Do your clients need help in assessing the financial solidity of their buyers? Do your clients need to improve their cash flow? Facts We can help with any of these trade challenges Too few losses means lost sales minimal growth: credit too conservative Losses > 1% of sales generally means there is no credit company profitability impeded Most companies looking to expand internationally think LC s or CIA are only secure transaction options. 49% of credit insured companies successfully obtain a bank loan compared to 34% of noninsured companies Trade receivables represents at least 35% of a company s assets Banks will lend against insured Foreign AR 22
Nick Fow Euler Hermes North America Central Region Phone +1.502.365.3365 nicholas.fow@eulerhermes.com www.eulerhermes.us Q & A Thank you for your attention. www.eulerhermes.us
Agenda 1. Credit Insurance Overview 2. The Euler Hermes Group 3. Trade Credit ditinsurance Benefits and Products 4. Benefits and Questions to ask your Clients 5. Appendix Case Studies 24
Case Study Steel Service Center Exports Company: Situation: Objective: Company Sales: Covered Sales: Solution: customers. Premium: $569,000 Deductible: $100,000 Coinsurance: 10% Privatelyheld steel servicecenter center of rolled steel products Acquiring international business to further expand internationally as a result, total international sales increasing 10 x. In addition Potential large new buyer in China refused to conduct business with the company on CIA basis. In order to acquire this large sales contract, the company needed to offer competitive open terms. Initially, the company only wanted to cover this single Chinese debtor. To encourage the company to consider the benefits of broadening the program, EH proposed that the company compile a list of all international buyers post acquisition: Sales Expansion, International Risk Mitigation $1,250 million $320 million Full portfolio coverage for international accounts only to secure more affordable premium and broader coverage. Sales team is now able to aggressively promote open terms internationally to increase sales with existing clients, as well as marketingto to potential new 25
Case Study Machinery & Equipment Concentrations Company: Manufacturer of rubber processing equipment and machine production systems Situation: Largest buyer is about 40% of sales. German parent company is extremely concerned about the US operation s growing concentration Objective: Single Debtor Policy Company Sales: $500 million Covered Sales: $200 million Solution: Insured the single account for catastrophic loss Premium: $150,000 Deductible: $0 Coinsurance: 10% 26
Case Study Manufacturer Portfolio Credit Management Company: Manufacturer of industrial power supplies, battery management and charging systems, power distributors and other complementary accessories. Situation: ti No internal credit management CFO responsible No time. Objective: Allow the CFO to concentrate on business issues let Euler Hermes monitor their accounts Company Sales: $5 million Covered Sales: $5 million Solution: Full portfolio for domestic and export receivables. Alleviated CFO s concern about growing receivables, allowed business to grow No need to add credit staff this year for credit monitoring Premium: $25,000 Deductible: $15,000 Coinsurance: 10% 27
Case Study Chemicals Portfolio Credit Management Company: Privately held supplier of flavor enhancers, sweeteners and nutritional ingredients for foods, beverage, and pet nutrition industries. Situation: Due to economy, the company is concerned about a growing trend of slow pay accounts. Has relatively finite customer base of approx. 15 buyers. Experienced some close calls re: customer default in past two years, but recouped payments through third party collections. Initially interested in only insuring top 5 debtors. Objective: Risk Mitigation Company Sales: $100 million Covered Sales: $100 million Solution: Full portfolio coverage for domestic accounts to secure more affordable premium and broader coverage. Currently considering using EHUMA as third party collections provider as well. Premium: $125,000 DCL: Yes $100,000 Aggregate Deductible: $25,000 Coinsurance: 10% 28
Thank you for your attention. ti