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Receivable Put Contracts and Trade Credit Insurance: A Comparison

Todd Lynady

Economists often make a joke about how companies weather the cyclical nature of business, “When the tide goes out, we’ll see who’s swimming naked.” The Covid pandemic was more of a tsunami than a mere tide, shuttering or weakening scores of businesses. Many that survived are highly leveraged after grappling with a full year of disruption, which continues to this day.

The tenuous situation has ripple effects because companies that cannot pay their bills financially weaken their trading partners. Manufacturers and wholesalers selling on open account terms often turn to Trade Credit Insurance to protect against this risk of non-payment. However, during periods of elevated risk, the cost of Trade Credit Insurance increases while the willingness of insurers to provide coverage decreases.

Suppliers that still want the benefit of trading with companies where Trade Credit Insurance is not available have another risk-mitigation tool available to them, Receivable Put Contracts. While different in many ways than Trade Credit Insurance, Receivable Put Contracts can work alongside Trade Credit Insurance to protect the risk of a customer’s bankruptcy.

What is a Receivable Put Contract?

A Receivable Put Contract provides suppliers with the ability to “pre-sell” their unsecured trade claims to a third party in the event of the bankruptcy of a buyer. The contract can be customized according to tenor and contract amount to meet the supplier’s needs.

There are two types of Receivable Put Contracts. The most common is a Pre-Petition Contract, which is typically purchased after the Trade Credit Insurance provider has stopped providing or canceled coverage but before the buyer has filed for Chapter 11 bankruptcy. Pre-Petition contracts typically offer 100% coverage, however, some providers provide flexibility of lower coverage amounts in exchange for lower pricing.

A Post-Petition Contact provides protection on companies that have already filed Chapter 11 bankruptcy and are still in bankruptcy protection, presenting a higher risk of liquidation. Investors are already in place for these contracts at coverage of 70-80% on average.

Receivable Put Contracts are typically issued for publicly traded or large private companies with audited financials. Coverage can be found for all sectors including, transportation, hospitality, airlines, retail, and metals, to name a few.

It should be noted that any bona fide obligation can be covered by a Put, not only receivables. For example, Puts can be secured for inventory finance or supplier repurchase default coverage. For a Receivable Put contract to “buy the claim” the obligation due, i.e., amount owed to the vendor must be scheduled in the bankruptcy document.

How is a Receivable Put Contract Different from Trade Credit Insurance?

Here are the key differences between these two types of risk mitigation tools:

  • Receivable Put contracts are loss-occurring, meaning that the contract must be in place at the date of the loss. Trade Credit Insurance is risk-attaching, meaning that the sale of the good or service must have occurred during the policy period regardless of the date of the loss.
  • Receivable Put Contracts only protect against a buyer’s bankruptcy, while typical Trade Credit Insurance policies protect against both bankruptcy and protracted default (slow pay.)
  • Receivable Put Contracts are usually more expensive than Trade Credit Insurance. As such, they are usually only used when Trade Credit Insurance is not available due to the buyer’s risk profile. Due to this increased risk, rates are generally around 1% per month for coverage with a minimum contract term of 3 to 6 months and as long as 12 months.

Who Offers Receivables Puts?

Puts are offered by major banks and asset managers, as well as hedge and credit funds.

What are the Benefits?

Using a Receivable Put Contract allows suppliers to safely continue selling goods to a riskier companies when traditional Trade Credit Insurance coverage is not available in order to continue supporting their customer base and maintain market share. The contract essentially gives the vendor the ability to sell their claim at a predetermined price and discount rate.

Find Out More

Receivable Put Contracts can be an integral part of a company’s credit risk mitigation strategy, alongside Trade Credit Insurance, for protecting receivables in today’s volatile economic environment. LiquidX offers Receivable Puts as part of our overall trade finance and working capital management offering. If you would like more information, please contact Todd Lynady, Global Head of Insurance Sales & Business Development at [email protected] or +1 (718) 866-8454.