Using put options successfully as bankruptcy protection
Monday, June 22, 2009 at 03:18PM Excerpt from ICBA Advantage Issue 3 - Spring 2009
Businesses want solutions that provide protection against the results of distressed customers going bankrupt. The ICBA member for Mexico, Brazil, Hong Kong, China and the U.S. gets client requests for creative and sound solutions to this problem. Yet, credit insurance is not always an available option.
An alternative that works to good effect is an Accounts Receivable Put Option (A/R Put), but consider:
Positives: "Puts" are often available on distressed credits when credit insurance is not, and are typically structured with 100% cover and typically non-cancelable. Put providers do not restrict shipments made to customers facing bankruptcy.
Negatives: Expense. A Put example: an advance fee of 3.95% per month at a cost of $474,000/year for every $1 million covered. Puts only cover loss due to bankruptcy. Protracted default (slow pay) is not covered and cover applies to a defined period, not shipments made.
The result: Increased sales. Despite the high cost, protection afforded by an A/R Put can allow a seller to justify continued sales to a distressed client without shortening credit terms. The seller enjoys confidence of reduced possibility of preference liability and has protected market share with the distressed client company. The Put opens the door to increased sales as competitors work to lower credit exposures with the client.
(Excerpt from ICBA Advantage - The newsletter for trade credit insurance solutions - Issue 3 - Spring 2009. © 2009 International Credit Brokers Alliance (ICBA) www.icba-online.com. Company and product names are trademarks of their respective companies.)