Accounts Receivable Puts can offer protection that you might get from a single-buyer credit insurance policy, but in another form.
Accounts Receivable Puts provide non-cancellable credit protection to cover your large credit risks with either public or privately held customers or suppliers, even if that customer is in financial distress. With a Put, the underwriting counterparty is a large investment bank rather than an insurer.
Accounts Receivable Put Structure. You pay a fee for the option of selling your accounts receivable to a counterparty, often a major money center bank, at a pre-established price within an agreed timeframe (typically 6-60 months), if a pre-defined event occurs, such as customer bankruptcy. This credit protection can be tailored to your requirements with the following features:
- Can be written to cover a single customer, even those in financial distress or in Chapter 11.
- The term can be from 6-60 months.
- Risks covered range from $500,000 up to $100,000,000.
- The coverage is usually non-cancellable coverage, and non-reducible.
- In a Put contract, there are usually no deductibles or coinsurance – the coverage is at 100%.
- Accounts Receivable Puts are generally treated as insurance under GAAP and as such can be off-balance sheet and expensed.
Accounts Receivable Put underwriters, usually large institutions themselves, hedge their risk by buying “credit default swaps” (CDS). CDSs are very complex and generally not suitable for non-financial corporations. Credit insurers, on the other hand, backstop their capital by buying reinsurance.
Accounts Receivable Puts can be a very suitable tool for U.S. corporates, particularly where the traditional credit insurance market has either insufficient capacity or no appetite for a given credit risk.
Traditional credit insurance is also a viable alternative for many companies without the ,large risks covered by “puts”. See our post on Trade Credit Insurance.
Please contact us if you are interested in Accounts Receivable Put trade credit risk protection.