Given the current downturn,
credit insurance can sometimes be useful as an early warning
system-even when you don't receive a check.
"We weren't caught by Aleris at all,"
said one scrapyard executive, referring to the February
bankruptcy filing by Aleris International Inc., Beachwood,
Ohio. He tipped his hat to the German-based underwriter that
provides his coverage against unpaid bills caused by financial
woes. "They're tightening up on the amount that they're willing
to insure, but they are good in the sense that they will notify
you," he said.
"They cut the amount of Aleris coverage
in half back in December.," he added. "We were very cautious
after that because Aleris was so slow with payments. Once we
got paid (by Aleris) we decided to wait and see, even though we
had some open orders with them in January. After the insurance
was canceled, we didn't ship."
Another recycler, though he buys such
coverage, perceives credit insurers as likely to add
undesirable momentum to the upswings and downswings of the
economy-and secondary smelting in particular. "(Lenders')
credit lines aren't available even for viable, strong
companies," he said, "so the credit insurers are listing almost
nobody these days" among consumers of aluminum scrap.
Even the first executive, grateful for
the cue to drop Aleris, is unsure whether the arithmetic of
credit insurance will continue working in his favor. He cites a
$40,000 deductible each year plus a 95-percent cap on
reimbursements, so there's no net reimbursement unless a year's
defaulted bills approach $100,000. At current aluminum prices,
no single customer will owe $100,000 unless they're receiving
shipments daily, he said. "A lot of people would have to go"
downhill for the policy to pay for itself.
One sales pitch from credit insurers is
that their product can offset the concentration risk of selling
into an industry with a shrinking number of players.
The 2007 acquisition of Wabash Alloys
LLC, Wabash, Ind., by Aleris prompted some scrapyards to
cultivate the lesser smelters buying secondary aluminum. That
strategy would prove to be a wise move, given Aleris' financial
For brokers selling credit insurance, a
narrow policy focused on a company's top two or three customers
is portrayed as an alternative response to industry
consolidation. "Clients can deal with concentration risk by
sharing some of their larger exposures with credit insurers in
order to sell more to such customers," said one brokerage
executive chatting with recyclers in an off-the-record
conference call organized by the Institute of Scrap Recycling
Industries, Inc. "Accounts receivable can represent 35 to 40
percent of a company's current assets. To leave those uninsured
while other issues are insured-property, equipment and
He described U.S.-based underwriters of
trade credit as tending to focus on worst-case coverage, with
limited interest on broad policies covering large numbers of
customers. Where the debtor company is already known to be in
trouble, a policy might have a large deductible but be
non-cancelable for a 12-month or 18-month period. This
contrasts with the approach of European-based underwriters,
which offer much wider coverage for receivables but on terms
that are adjustable on short notice, deleting particular
customers of an insurance client or reducing the customer's
covered debt limit.
Some U.S. customers find that
disconcerting during an economic downturn, brokers acknowledge.
"We've had some clients who are uncomfortable with the ability
of the insurers to move away from some of the coverage," said
one of the conference call's participants. The clients "have
actually turned to us to move into more of a catastrophic or
non-cancelable type of policy."
The broker said the traditional credit
insurers are typically based out of Europe Atradius NV, based
in the Netherlands; France's Compagnie Française
d'Assurance pour le Commerce Extérieur (Coface); and
Germany's Euler Hermes Kreditversicherungs-AG.
"We saw rates fall to some of their
lowest points in 2007. Now they are increasing. Insurers are
taking more and more losses," he said.
Another conference call participant
supplied greater detail on 1997 to 2007. "Their loss history
was good," the brokerage executive said. "This made them
compete for business by decreasing rates. They also became a
lot more aggressive in approving buyer limits-which was good
while times were good. Rates got so low that some insurers were
complaining they didn't get enough return on their
Even now, credit insurance hasn't dried
up, according to one of the conference call's speakers. "There
are plenty of underwriters out there that still haven't really
had a large number of losses. Some have been hit with a lot of
low-value losses, but the market hasn't been hit with any
large-value losses yet," he said. "Underwriting capacity is
still out there, but it's just a little bit tougher than it's
been in the last couple of years."
Suppliers of trade credit can get fancy
when a potentially dicey vendor is a publicly traded company
with transparent financials.
A die caster recalled buying 18 months
of credit protection on General Motors Corp., Detroit. He said
the deal was arranged through a bank and was based on financial
derivatives involving GM's equity and debt securities. In crude
terms, the provider of that 18 months of trade credit had
shorted GM. If the company took a turn for the worse, the
derivatives investment would yield a payoff from which to
reimburse the unlucky trade creditor. However, the credit
provider chose not to re-up. "When it ran out, after the 18
months, they said 'we don't write any, at any price,' so I
couldn't get any more."
And he's not interested in conventional
credit insurance. "If they can say 'we're no longer covering
General Motors after 90 days' and I've got a one-year contract,
I've just wasted my money." PAUL SCHAFFER