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Losses can be large, sudden and unexpected

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Recently, OW Bunker, one of the world’s largest bunker suppliers, said it filed for bankruptcy, less than two days after it announced at least $275 million in losses stemming from fraud at Singapore subsidiary Dynamic Oil Trading and mark-to-market losses.

The Danish company, which claims 7% of global bunker market share, said in-court restructuring procedures had not presented a “sustainable solution” that left it with no alternative to bankruptcy.

The company was just publicly listed in Copenhagen in March this year and has since halted trading and been removed from the stock exchange listing.

It is believed that credit insurers will be paying high levels of claims.

Credit insurance – a possible alternative to Letters of Credit

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A Letter of Credit is widely acknowledged as being the most reassuring guarantee of payment in international commercial transactions.

Commonly referred to as an LC, it ensures the settlement and successful completion of a commercial contract between an importer/buyer and an exporter/seller by the bond of their respective banks.

So, how can a credit insurance policy be an interesting alternative to a Letter of Credit today?

As a result of frequent questions from companies who have regularly used this type of payment security, we have carried out some research among our clients regarding their view of a Letter of Credit.

Overall we came to the same conclusions and noted similar drawbacks.

Most agree that Letters of Credit are a secure solution (compensation in full, without delay). However:

  • There are some constraints: a Letter of Credit can complicated and take a long time to implement; completing the paperwork can be very time-consuming, attention to exact detail is essential and it can be costly.
  • There are some concerns: whether the issuing bank confirms the Letter of Credit or not (buyer’s bank) is a real problem, especially when dealing with countries experiencing political instability.

Based on this evidence, it has been possible for us to demonstrate that credit insurance policies that are properly structured can provide far more flexibility at significantly lower pricing.

Non-Recourse Invoice Discounting Facility v Recourse Invoice Discounting with a separate Credit Insurance Policy

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In his latest blog, Mark Barton of our UK associate, Hanwell Atkinson Ltd, assesses the pros and cons of non-recourse invoice discounting compared to recourse invoice discounting allied with a credit insurance policy.

Many companies factoring their invoices also wish to take advantage of credit insurance or bad debt protection and this can be achieved in one of two ways. Some factoring companies offer a non-recourse factoring facility which, as the name suggests, is without recourse to the client in the event of a failure of the customer. Read more →