Issue 9 February - May 2002

Traders spoke to Tony Coles, senior manager, Credit Guarantee Insurance Corporation (CGIC).

Can you provide a brief overview of the history and current position of CGIC?
Credit Guarantee Insurance Corporation (CGIC) was founded in 1958 as an initiative of South Africa’s export community, and its banking and insurance corporations. As a result, CGIC’s shareholding was, and still is, split between the banking and insurance communities of South Africa, barring a 6.6% public sector shareholding through the Industrial Development Corporation (IDC). Soon after its formation, the Re-Insurance Act was passed through parliament which gave the South African Government scope to re-insure political risk. Credit Guarantee, as the only credit insurance company at that time, entered into an agreement with government to provide insurance cover for political risk backed by government under this Re-Insurance Act. The agreement remained in place until mid-2001 when government decided to establish its own export credit agency. Since then, we have successfully managed to place our political risk cover—as was always done with our commercial risk—in the international market. This is a direct result of the market’s evolution. When Credit Guarantee was established, one could rarely get political risk cover in the international market. The situation has changed significantly; meaning one no longer has to be reliant on governments for the underwriting of political risk.

Can you explain the difference between political risk and commercial risk?
There are two components to credit insurance, namely Political Risk and Commercial Risk. In essence the difference between the two is that under Commercial Risk the buyer is responsible for his actions in meeting his payment commitments, ie whether he can or will pay when he has committed to do so. Under Political Risk the buyer has no control over the actions of his own or another government. Credit Guarantee takes Commercial Risk ie insolvency, repudiation or protracted default for its own account and re-insures this through the international market. Political Risk is slightly more complicated. While one can easily analyse the balance sheet of a company and, based upon its history, global industry trends, etc, make a good assumption about its ability to pay its debts, it is more difficult to predict whether countries will go to war or not, or what their future economic prospects will be, which might affect their foreign exchange reserves and therefore the ability of a buyer, willing and able to pay his debt, to obtain foreign currency. Wars which do not involve either the buyer’s or seller’s country can also disrupt deliveries to the region where a war is taking place. In this event, an exporter may suffer a loss because of a distress sale of his goods or because his buyer cannot obtain foreign exchange to settle his debt. This Political Risk is covered by us.

The developments with the South African Department of Trade and Industry (DTI) could be perceived as losing a protected market and there is some concern that this might impact on your ability to conduct “business as usual”
Going into the international market has given us more scope and independence. Under the agreement with DTI, we had limited freedom of movement so in one sense, the developments have been an advantage for us. When political risk was re-insured for South African exporters by the South African government, it meant ultimately it was the taxpayer that paid. As a result, Government did not pay for any losses incurred for goods that were not South African. By obtaining political risk re-insurance in the international market, CGIC is now able to provide cover for goods moving from countries outside of South Africa. This is a distinct advantage as there are many companies that are establishing themselves in foreign countries in order to develop their exports better.

Is CGIC active in the rest of Africa?
Recognising that there was business to be done outside South Africa, we assisted in establishing a company in Zimbabwe called Credsure approximately 30 years ago. We are still shareholders in this operation, despite the difficulties in Zimbabwe at present. In 1998 we actively began pursuing global diversification and entered into agreements with insurance companies in Mauritius, Kenya, Ghana, Namibia and Swaziland. We are now looking at Zambia and Tanzania as additional markets. Typically when we enter a market in Africa we do so by means of fronting agreements with companies there. This allows them access to our expertise and 100% cover, and we have use of their capital, contacts and staff. The credit insurance policies are issued in their name, but are fully backed by us. We are only offering commercial risk at this stage, but with developments in the international market going the way they are, we may soon be able to offer political risk cover through Lloyds of London on behalf of African based companies as well.

What about growth outside Africa?
In addition to Africa, we are expanding into South America. In 1998, we formed a joint venture with the largest insurance group in Spain, MAPFRE, with the objective of entering the South American market. We believed that that market offered great potential, but that there was very little credit insurance available for local exporters. This joint venture, in conjunction with one of the largest industrial conglomerates in South America, opened a credit insurance company in Colombia under the name of CREDISEGURO and after only a year in operation, was already profitable. We have also taken over a company in Chile and established a new bonding company in Brazil. In May 2002 we expect to have a new company set up in Mexico as well. Quite apart from this, we have a co-operation agreement in place with a major credit insurance company in Germany called Gerling General. In terms of this agreement, we provide credit insurance cover locally for German companies and they provide credit insurance cover in Europe for South African companies.

What is the duration of your cover?
We offer both short and medium term cover. Short term is where business is done up to a 180 day period (6 months), while medium to long term refers to cases where the risk is spread over anything from one to ten years. Medium to long term generally applies to major contracts or projects.

How do you assess risk?
In terms of our export transactions, the first step is always to look at the country in question. We have an economics department that evaluates the country’s payment possibilities in terms of foreign exchange, as well as its overall economic and political situation. Based on this, the country is given a rating of 1 to 3. 1 generally refers to countries such as Switzerland, USA, UK etc, 2 is medium risk, while 3 is higher risk. The evaluation determines whether the country is insurable or not. There are only a few countries in the world where we are not prepared to take the risk. Although we are re-insured, it is not a 100% cover, so we have to be prepared to carry a portion of the risk ourselves. Moreover, our re-insurers will probably come to the same conclusions, as all credit insurance / re-insurance companies work on more or less the same system of ratings. Having said that, our attitude is always to try and find a way around the risk before saying no. We may find, for instance, that a risk in any particular country is not acceptable, but by structuring the agreement with guarantees and payment flows, it could become workable. We have done transactions in several countries where the risk was relatively short term and structured in such a way that payment flowed consistently, whereas without that structure we could not have helped the exporter. Each project is evaluated individually. We look at anything.

Once it is decided that a country is insurable, we will then look at the debtor’s history and company structure, ie ability to pay. For this function, we use an in-house bureau with information that has been accumulated over many years, as well as overseas sources who know better what is going on in their own countries than we do. Once all information has been collected, we conduct a final analysis. The amount of money involved determines the depth of this analysis.

For domestic transactions, ie sales within South Africa, we conduct a similarly exhaustive analysis but without the need for a country assessment.

Who would benefit most from your services?
Anyone who is selling anything on credit. We have major companies as clients, as well as small companies. The only thing we do not provide is credit insurance to companies selling to individuals. It has to be a company structure/registered entity so that we can evaluate the risk.

Product preview
By John Thornton, senior manager sales and servicing

Debtor Financing
CGIC has recognised a need to create opportunities for debtor financing. Under the current system, banks will only advance 30-35% against the debtor’s book. As such, if you have a debtor’s book of R100 000, the banks will only provide an overdraft facility of R30 000–R35 000 based on that book. CGIC and BOE bank will be launching a product early this year, whereby CGIC will enhance the credit value of the debtor’s book by insuring it. BOE thus knows that 75-80% of the debtor’s book is insured and as a result, is in a position to advance additional working capital so that the client’s business is able to grow. In short, BOE will provide the finance and Credit Guarantee will provide the underwriting capacity.

The product uses risk financing which is an off-balance sheet financing mechanism. We create a self-funding mechanism for the client on the bottom layer, and on the top layer an insurance arrangement (risk insurance or premium layer). This means that the client will elect to accept risk up to a certain value and anything above this figure will be covered 100%.

Securitisation
We are working on other alliances with financial institutions and are actively looking at credit enhancement for trade debtor securitisation. Effectively, the system enables larger companies to mobilise their debtors by selling them off into a special purpose vehicle. Credit Guarantee insures the debtors in that special purpose vehicle, using the strength of its own balance sheet to support the mechanism. Investors can have complete peace of mind in the knowledge that the book is fully guaranteed by a double AA rated credit insurance company, namely Credit Guarantee.

Risk profiling
CGIC is currently working with banks and other institutions on developing a risk-profiling model that will offer an accurate assessment of a debtor book’s quality. Typically, when a securitisation deal is being considered, the book is rated by a rating agency. This rating takes the methodology and management of the book into account, but fails to assess the quality of the debtors. CGIC will be able to take a debtor’s book and say what percentage is made up of poor debtors, good quality debtors, etc. This classification is generally based on information such as how long the business has been in existence, what the balance sheet ratios look like, whether any other CGIC clients have reported overdue accounts, whether directors have previously been involved in a company that has been liquidated etc. Sophisticated models enable this to be done in a dynamic fashion. Data is downloaded into CGIC’s system on a daily basis, meaning that the risk profiling of debtors changes with the latest inputs.

Pre-shipment cover
The pre-shipment policy covers risk prior to delivery. This is in the advent that a company secures an order for a custom made product, but before delivery can be made, something happens such as the debtor goes into liquidation. The manufacturer has incurred working capital costs, which could significantly impact on business operations. The IDC is working closely with CGIC on providing finance against this Pre-shipment risk.

Small company packages
In terms of smaller companies, we have developed a business builder department that focuses specifically on the SME market. The idea is to help develop these companies because if their business grows, so does ours! On the Export side there is Export Builder which was devised to assist the smaller exporter. It works on a fixed monthly premium as opposed to a declaration basis and is paid by debit order. The cover is slightly restricted in so far as the repudiation of documents is not included. The policy offers clients access to CregaLink, which is the online credit insurance management system. Through this, clients can access the CGIC database to look for credit approvals. The premium entry level for Export Builder is approximately R2 500 per month.

For further information, contact Tony Coles on tel: +27 11 889 7493 or John Thornton on +27 11 889 7274