The Factoring – Credit Insurance Working Group held its sixth annual meeting on 31 March 2021, to discuss
the state of the industry. The Working Group is comprised of senior executives from the factoring and
credit insurance industries, including the heads of the respective industry bodies FCI, Berne Union and
ICISA. Factoring and credit insurance share many similarities and work side by side to provide capital to
SMEs around the world. The aim of the working group is to educate, advocate, and increase cooperation
between the two industries. The group reviewed the effect of the crisis on our respective sectors and other
developments, the impact on the demise of Greensill Capital, and the role that Funds played and will play
in the future. Below are some highlights from the meeting.

2020 Performance and 2021 Prognosis

While most of the financial industry suffered from the pandemic of 2020, many credit insurers had one of
the best years in terms of performance! Claims were quite low considering the extensive volatility in the
global economy. The programs initiated by the European governments were supportive, which helped to
reduce the claims requirements, and the EU state support was extended until 30 June 2021. For 2021, the
outlook doesn’t look too bad. It is uncertain what the governments will do, but it may be better than
expected with their continuous stimulus and support to industry.

Given the number of zombie companies supported by artificial government stimulus, the Berne Union and
ICISA expect a surge in claims towards the end of 2021 into 2022. The moratorium which supported these
companies is soon coming to an end. US retail, as well as the commodity sector were hard hit. They
indicated that there were other frauds and defaults, but they did not make the headline news. Some of the
smaller private insurers decided not to join any of the government support schemes due to the costs and
controls required by the governments.

Euler stated that they expect to see a negative turn in terms of risk with the approaching cessation of
global government stimulus programs. The credit insurance volume in 2020 declined slightly year over
year. Some sectors were hit harder than others, like hospitality/tourism, retail, etc.…but it wasn’t a big
deal to get the limits back for these sectors. Euler stated that they also see a similar increase in demand,
driven by the need for capital relief products from the banks. However, they did report the first drop in
credit insurance-backed factoring volume in over 30 years.

Coface said in 2020, and the hardest hit was retail, especially in the US, with a significant rise in longer
claims. Turnover was impacted as well. There is a need to have more of a customer-centered approach and
look at the specificities of the transaction. Projections for 2021 show they are expecting a spike in risk later
in the year. But, at the same time, they are also seeing demand pick up, driven by an increase in new
business and experiencing an increase in pricing due to the increased risk.

Atradius stated it was mainly a decent year in 2020. The expectations for 2H2021 is to see an increase in
claims, but at least today, it’s business as usual. Numbers regarding their factoring portfolio are stable.
They see more demand as well for capital relief products. Regarding Africa, they have some concerns,
especially in South Africa. However, the rest of the markets there are quite small and not as much as a
worry.

Evolution of reverse factoring/payables finance post Greensill

The working group discussed the perils of the Greensill Capital case, which filed for bankruptcy protection
on March 8, 2021. They had focused on providing financing to companies using supply chain
financing/reverse factoring and other related receivables finance services. Their credit insurer, BCC/Tokio,
had pulled out of the program, which resulted in a domino effect, ultimately resulting in their bankruptcy.

The question is what caused the domino effect. The industry bodies seem to be of the opinion that it
wasn’t due to the non-renewal of the policy. It appears the domino effect was caused by sub-standard risks
fed into the policy that the insurer was no longer willing to take on its balance sheet. Greensill was
apparently unable to place the risks during the 6-month notification period. This tells us that the domino
started long before the time that Greensill started talking to the media about the non-renewal of their
credit insurance policy. It might have been the last push, but it was most certainly not the start of the
death-spiral of an otherwise thriving company, as Greensill may have wanted people to believe.
Some unsavoury practices have come to light, including potential fraud. Although their company was
known as a leader in the SCF space, their demise is not considered a systemic risk to the financial or the
factoring and receivables finance sectors. However, it could result in potential future regulations around
such issues as regulating third-party funds, the factoring of future invoices, and possibly some spotlight on
the role of credit insurance in the RF space. Questions were raised in the group about the responsibility of
these funds and who regulates them. There was also concern about the arms-length approach that these
funds take with regards to factoring. In the Credit Suisse case, it appears that they did not have a handle on
the operations risk that existed. Some also expressed concerns about the reported rogue underwriter in
Australia with the subsidiary of Tokio Marine in Australia, BCC, who exceeded their authority, resulting in a
large concentration risk in a suspect-related group of clients.

One stated they had a number of factoring companies worried about the fall-out effect regarding the
Greensill case. Many now disclose all reverse factoring exposure in the buyer’s balance sheet and disclose
their programs voluntarily. The increase in disclosure will be viewed positively by all parties. SCF may be
initially tarnished, but the working group believes there will be little residue effect on the credit insurance
sector. SCF is estimated to be less than 1% of the total credit insurance sector’s market. We have to go
back to basics and follow the number 1 rule,” Know Your Client”!

Some from the factoring side believe reverse factoring will get a bloody nose, a pity since it wasn’t the
product’s fault, and more about poor business practices from all parties. In France, SCF is not as developed
and is more practiced in Spain and Portugal. We have lessons to learn from this case, such as on-board
clients under such programs without strong and robust due diligence and positive ratings of the anchor
buyer.

One thought expressed was that we need to see more rules and standardization in SCF in general. Issues
like extended terms need to be dealt with. We need to re-think the way of accounting treatment in
general. We need to have clarity regarding accounting treatment. Euler agreed, saying this issue is a hidden
risk. We need clarity from the accounting boards.

Receivables Finance as Investable Asset Class – Impact of AR Funds from crisis

It was stated that as factoring and SCF increased, so has the liquidity needs of players. Banks have
traditionally filled this gap. But our industry has nearly tripled in size over the past decade. This is changing
with the rise of Fintechs and other third parties, such as the increased prominence of hedge funds, family
offices, and other types of asset managers on the playing field. With a low-interest-rate environment,
investors are looking for yield and safety. But the general consensus was the need to support this important initiative. However, the Greensill case brought to light some of the concerns that these arms- length funds have when underwriting programs and getting engaged in the RF space. The obvious outcome is that some Funds are not doing their due diligence. There is also an issue of the practice of loss payeewhen these funds are working with factors/SCF firms as they do not have the control as we saw in theGreensill case. In general, these funds pose a potential risk to the industry when operating indirectly and at arm’s length. The ones that get it right know what is going on underneath the hood of the car, and those that do not will be subject to operational, concentration, dilution, and potentially fraud risk.

Rating agency role should also be questioned about the market’s reliance on determining these program’s
creditworthiness. They don’t know enough about the risks, and just having the backing of credit insurance
isn’t enough. Investors should not solely rely on the strength of a third-party risk mitigant. It appears that
BCC didn’t want to be insuring these third-party, arms-length investors. It wasn’t a AA investment-grade
structure!

Some insurers stated that they are investing in such forms like securitizations involving bankruptcy-remote
entities. If it’s a good seller, good structure, and the buyers are diversified, this is something they can do in
their sleep. The rise of these funds is a positive and potential negative development if they don’t do it
right. NBFIs support more SMEs than the banks, so they are strategic. As long as they can structure the
programs securely and the structure is sound, they will again get the insurance sector’s support.

Joint CI/RF coordinated lobbying to adopt insurance shields globally

FCI had led an initiative in June 2020 to support the creation of a credit insurance shield in the US.
Together with ICISA, we had organized a joint letter including the support of the major credit insurers to
promote the formation of a shield in the US. It was sent to the US Treasury and US Department of
Commerce. We received an acknowledgment, but in part due to the elections, it did not get much
attention but was a worthwhile exercise. Unfortunately, it was not included in the top 100 priorities of the
Trump administration. But we agreed that a second attempt should be made with the new Biden
administration. Willis had written an effective paper, so it is a good basis for future communication.
Some stated that regarding the European programs, in hindsight, the industry is not sure of their
effectiveness. They were quite expensive to the insurers, reducing margins and ceding income to the
governments with no corresponding claims. Opinions are divided, in some countries like Denmark, it was
well-received, but in others not so much. There were also challenges in implementing these credit
insurance shields. There was no formality to them, so each market experience in the EU was different.
And they were very hard to administer for the insurance companies. But the overall benefit was obvious,
supporting line structures in a fast deteriorating global economy!

Conclusion

In many ways, Factoring and Credit Insurance are tied at the hip – we are reliant on each other, symbiotic
to a great extent. In essence, what happens to the one happens to the other due to our close correlation of
supporting financing commercial transactions. As the reader can see, this past year was quite tumultuous
but not as cataclysmic as some doomsayers were predicting. In fact, both industries got through it without
too much trouble for a myriad of reasons. Although we are in a strong rebound economically, many predict
a spill-over effect later in the year or 2022. Time will tell, and we will need to keep a close eye on these
developments. We learned many things this past year, especially how a house of cards can collapse when
factoring, whether traditional or reverse is not practiced properly. But we also learned how factoring has
survived in one of the worst economic periods in our lifetimes. With the potentially increased risk environment approaching, companies will seek to mitigate the risk of their receivables. And credit insurers
will surely step up. In fact, factoring always does well during challenging periods. Its secure nature and the
controls that factoring affords will always allow it to sail through these harsh economic times.

The FCI Factoring-Credit Insurance Working Group is comprised of the following representatives:

Patrick DE VILLEPIN, FCI Chairman, France
Vinco DAVID, Secretary-General, Berne Union
Arturs KARLSONS, Associate Director, Berne Union
Rob NIJHOUT, Executive Director, ICISA, Netherlands
Richard WULFF, Executive Director in-waiting, ICISA, Netherlands
Laurent GOUREVICH, Head of Fin Institutions – Western Europe, Coface France
Bert VAN HAGEN, MD, Atradius, Netherlands
Lucia BALIETTI, Global Head-Direct Sales, Euler Hermes, France
Stephanie PELLET, Structured Finance Manager, Euler Hermes, France
Julian HUDSON, Global Head of Trade Credit, Chubb, UK
Kanayo AWANI, MD, Intra-African Trade, AfreximBank, Egypt
Peter MULROY, Secretary-General, FCI, Netherlands