The brave new world of export credit

NZECO is underwritten by the New Zealand government. It acts as a last-resort financial backstop for New Zealand exporters and banks to help them manage risk and capitalise on international trade opportunities.

Its export credit products, particularly trade credit insurance, help cover the risk to exporters of non-payment for goods or services by a buyer, or of payment being delayed or denied because of an uncertain political environment.

In February, the government announced NZECO would implement a Short-Term Trade Credit Guarantee scheme, funded to $50 million, extended in June to $150 million. Under the scheme, NZECO will indemnify an exporter (or its bank) if its buyer fails to pay due to commercial or political events.

In figures released in May, ratings agency Dun & Bradstreet noted that 82,000 New Zealand firms had had their risk or payment profile downgraded since January 2008 – the largest number of downgrades ever in a 15-month period. The outlook for the coming 12 months remains grim, with close to 38,000 firms rated at a higher risk of financial distress and a further 44,000 more likely to pay their trade accounts in a severely delinquent manner.

“The downgrades are a clear sign that the crisis is impacting the real economy with the outlook for trade credit – the lifeblood of the economy – deteriorating severely. This in turn is limiting the ability of businesses to trade with each other,” says Dun & Bradstreet.

Any business selling on open credit is exposed to the problem of bad debts, says Rod Mathers of trade credit insurance broker Trade Credit Bureau Limited.

“Good credit management can reduce the risk exposure, but it can never be totally removed. For New Zealand exporters, the situation is made more risky by longer payment terms and the distance between them and the buyer. This can lead to delays in communication, limiting the information available on the buyer and the market.

“Add to this the possibility of political actions that might delay or stop payment from the buyer's country, and the risk profile increases yet again.”

Trade credit insurance has been one way for exporters to manage this risk, but the global financial credit crunch has made underwriters extremely risk averse. The three companies offering trade credit insurance in New Zealand – Atradius, QBE and Euler Hermes – have all pulled back from the market to some extent.

“To stay in business, underwriters are basically trying to reduce their risk by withdrawing or reducing the covers they have for buyers that have previously been approved,” says Rod Mathers.

Industries particularly affected are the commodity markets where New Zealand firms tend to trade.

“The wool industry has been particularly hard hit,” says Rod Mathers.

“We just did a renewal recently where the premium rate went up by about 500 percent, with huge deductables [excess]. Most underwriters are getting out of the wool business all together – QBE is not renewing cover for wool, for example.

“Credit insurers are so busy trying to reduce exposure that they’re furiously revisiting and revising all the limits they have granted in the past. One or two have got so tough, clients are seeking alternatives and, in doing this, are putting pressure on the one or two other insurers that may consider their business, but are looking to increase premiums.