When making economic forecasts, trade credit insurance providers like Atradius have a unique advantage. In addition to a team of economists based in its headquarters in Amsterdam, the company has an army of field staff in various markets around the world who send feedback on on-the-ground developments.
“We have highly skilled and experienced teams that are capable of analysing diverse information and identifying the key indicators that are likely to influence the markets,” says John Sutherland, Atradius’s Australia-based executive manager, risk services. “As a result, we are able to make clear and robust projections of the benefits and risks that may be encountered.”
Sutherland spoke to CFO Innovation’s Cesar Bacani about how Atradius arrives at its economic forecasts, what the company is currently seeing on the ground, how trade credit insurance works, and other issues. Excerpts:
How does Atradius come up with its economic forecasts?
Our team of economists in Amsterdam gathers information from a diverse range of sources, both financial and non financial. In addition to that, they get information from our people in the field.
This process is done on a continual basis. Most countries are reviewed at least twice a year, and clearly some countries more than others due to higher trade levels, with more focus on larger markets like China than on a place like Pakistan, for example.
So if the people on the ground find out something new, the forecasts will be changed?
We can have an influence. I’m not saying that something I say is going to change forecasts, but forecasts are a combination of the economic data, the claims activity that we may be seeing and a range of other information that we have when we write our reports.
If you look at what happened in 2008, there were signals and messages that were there and people didn’t necessarily recognise them. One truism is, when you’ve got a crisis like that, when the tide goes out, all of a sudden the jagged rocks underneath start to appear and people start to take notice.
We might be seeing some of the bumps on the road at a domestic level in an economy and we would be feeding that back. Now, whether our messages are noted . . . because in a micro-environment, using Australia as an example again, commodity prices may be starting to head downwards, but on a macro basis, the economy is still right and expectations are still quite high.
But I think by combining the expertise of the field staff, with that of our economists and the information we have, it provides an additional flavour to the outcome.
So how does Atradius see the prospects for the global economy going forward?
For all the major economic regions, be it Asia, Europe, America, we’re seeing a continuation of the growth we saw in 2010, but at a slower pace.
But I think there is a greater level of uncertainty at the moment, among people that I talk to, because they are concerned about the European debt crisis. Inflation is also starting to rear its head because the Chinese have started taking firmer action when it comes to dealing with inflation.
When people are nervous, you may end up in that 2008 situation and it could become a self-fulfilling prophecy. When people get nervous, they start to withdraw and all of a sudden it starts a bit of a run and then you have some greater problems.
But I don’t foresee a major issue like 2008 around the corner. The question for me is if there is a double dip [recession] or not. It is more likely to be a flat ‘Y’, in that there is only a slight dip, not a major correction, and then a slow and gradual take up. I tend to think that there will be a slight slowing, before it moves again.
You’re still holding to this view despite worries about Greece, Portugal, Italy and Spain? Are the chances of a double-dip global recession now higher because of the contagion of more sizeable economies?
It would be fair to say there are some concerning information in circulation at the moment when it comes to the global economy. This clearly includes the debt contagion that started in the smaller euro zone countries and it would appear to be slowly moving to some of the larger countries. Couple this with weak or dysfunctional governments and legislators, high debt levels and slow or slowing growth, and there are new questions in Europe.
At the same time, the US continues to struggle with its problems with regard to debt funding, political impasses and economic activity not at the consistent levels anticipated previously.
The third major trade region of Asia, which is dominated by a Japan that is trying to recover from [recent] natural disasters without clear and strong leadership and policy. And China, which was a force in driving growth in 2008, 2009 and 2010, is revising expectations and preparing to battle inflation.
So is a double dip a possibility? Maybe, although it is far too early talking about a double dip. Growth has slowed and there are clearly a number of risks. But on a global scale, we see growth in the emerging markets in particular, and more muted in the advanced world.
The key for me will be the next six months and how the reality of markets and trading zones plays out in conjunction with the sentiment. If both head down then, we will see a double dip.
If the circumstances remain as confusing as they are today, then the discussions will focus on winners and losers, the size and timing of a small dip and the longer road to sustainable recovery. So watch this space and be well prepared to react.
Let’s talk about the microeconomic picture. Are you seeing late payments or defaults among companies?
We are still seeing payment defaults, late payments, people asking for better credit terms – in other words, longer accounts trading.
One of the things that we also see a lot of is companies asking for bigger and bigger trading terms for larger amounts [higher credit limits], but it’s not being fulfilled. So they’re being optimistic about the future and maybe their optimism is not actually translating into dollar sales.
What do these trends mean for you as a credit insurance company?
When people come in for additional requests to take their limit from say, $1 million to $2 million, it makes us review the company. We’re looking for the latest financials and for any other indications. This helps in the process of keeping our data as accurate as possible and also to provide a service back to our customer by saying, yes, we’re quite happy to do that. Or no, because we have some concerns.
We have our buyer database, which we use to base our rating system on. It also provides us with a lot of data which helps us assess the strength of an economy – what we are seeing in terms of the ratings of companies that we see in a particular country.
Do clients have access to the Atradius database, which will help them assess the credit quality of potential buyers?
If you are a customer, you can get access to online information about your buyers via our online policy management tool [email protected]
In addition to managing your policy via this tool, customers also have free access to Atradius Buyer Ratings. This provides a snapshot of the likelihood of a buyer going into default within the next 12 months.
Our buyer ratings help our customers to gain a better insight in the overall health of their buyer portfolio; manage bad risk and identify good risk and any opportunity that comes with it.
Our buyer rating tool now provides ratings for buyers in almost 120 countries, and we will continue to further expand this list. In addition to this tool, we also provide a wealth of information through our publications, which may be on specific industries, countries or on the global economy.
A client can have access to information about everyone in the database?
As an individual customer, let’s say you’re an electronics company and you have distributors around the world, we can provide you with information about your distributors all around the world.
But we wouldn’t share information that belongs to another organisation. But the reality is, electronics companies probably have the same customers anyway. Samsung, Sony, LG and Sharp, something like that, selling to Hong Kong probably deal with the same companies there, Fortress and so on.
What’s the approval rate for credit insurance applications in Asia?
In Asia Pacific at the moment, our approval rate is hovering around 80%. I can’t comment on what other people do, I can only comment on what we do and for us, it’s averaging about that figure.
The reason why we are looking at holistically reviewing the risk is because quite often, as you know, in Asia the financials don’t necessarily reflect reality. You need to have a better understanding of your industry and business.
If the financials don’t reflect reality, you wouldn’t extend coverage?
No, not necessarily. Sometimes, we are not even allowed to view financials. Sometimes we go into a room and they show us financials across the table. We’re not allowed to take notes, we’re only allowed to look at them and then we walk out.
Isn’t this suspicious?
Well, it can be, but again, you’ve got to understand the circumstances. If this is a private family company, which has significant competitors where any information may provide them with an edge, then you can understand their reluctance, which is why they’re very secretive about it.
We look at financials but we also look at other information. Public companies are easy because there are public records. With family companies, quite often you don’t get good financials, but you can look at their trading history and see trends that are the same every year. And they still seem to be able to buy property.
We can also ask their customers: What’s your trading history with this private company? Have you ever had any delays? Have you had any problems? Have you seen their purchases increase over time?
Why were the 20% of applicants disapproved? What would be wrong with them?
It could be a number of things. It could be that they do have financial difficulties, it could be they do have defaults or delays or payment problems.
Do you find that Asian businesses in general, especially the family-owned businesses, are not as open to credit insurance compared with Europe or the US?
I don’t believe it’s a case that they’re not open to it, I think it’s a case that it’s not a product they are as familiar with and used universally, the way it has been for decades in Europe.
The awareness levels of credit insurance in Europe are way higher than here. We have been in Europe for nearly 90 years now. In Asia, it’s been much less than that.
Is it because Europeans are buyers, whereas Asians are suppliers?
It used to work that way. If we look at China, as an example, it imported huge amounts of equipment and expertise out of Europe as it started to build its own capabilities. Now, they’re producing raw materials and manufacturing products that are going back the other way and so they have a different need.
Are we seeing a trend in Asia of rising credit insurance?
Yes. If you insure your plant and equipment and stock, why wouldn’t you also insure your receivables, which represent a big chunk of your current assets? It’s a good tool to have as part of your armoury to protect your business and its cash flow.
How much would taking out credit insurance cost?
Generally speaking insurance costs are very reasonable. But when you take into account the country, when you take into account who the buyers are, the type of product, [the cost] can vary enormously.
Is it something like 1%, 20% of the transaction value?
Oh no, we’re talking basis points on turnover.
If you have to go to a bank to buy a guarantee, they’re going to want to tie up some your capital and restrict your ability to use that capital. It’s going to cost you money in terms of the guarantee fee and guarantee fees are not cheap. There’s a whole raft of questions you have to ask in terms of how do you best want to utilise your capital, what sort of expenses do you want to have, and how flexible do you want to be with your customers as you go into a new market.
There’s a full range of options, from doing business on a cash basis to making advance payments, to requiring letters of credit to guarantees from the bank. So as a CFO you just need to sit down and decide which ones work best?
You work out the best way to go and you’d probably be working it out with your sales staff because they’d be saying: Hang on, if I want to sell against our competitor, our edge might be in our ability to offer 60-days terms, as opposed to requiring the buyer to open an L/C or to pay cash upfront.
You’re able to offer 60 days terms because you have credit insurance?
Because your sale is supported by credit insurance. You may price this [the cost of credit insurance] into the product at $101 rather than $100, but your competitor may be pricing at an effectively higher rate because [it is passing on] the bank guarantee fees it paid.
Doesn’t moral hazard arise? Won’t some people say: You have credit insurance so I don’t need to pay you. Let’s just let Atradius take the hit.
They [the buyers] don’t necessarily know that they’re credit insured. We don’t go out and say, hey, we insured [your counterparty] so you don’t have to pay. Our customers wouldn’t like that, anyway.