How do international insurance corporations solve questions with Ukrainian debtors
Lately, international trade finance for merchandise accounts, equipment purchase and international export projects implementation is being discussed more and more often in Ukraine. Our entrepreneurs have already discovered to themselves all the advantages of this tool. Practical part of the Second International Seminar: Trade and Project Finance demonstrated this trend via examples of Ukrainian companies, which already closed deals of such type with the assistance of ECA Atradius, financing bank Rabobank and IBcontacts company.
There is also another side. After insuring financial risks of foreign supplier and foreign financing bank ECA becomes prisoner of a situation in case of insolvency of foreign customers.
Having achieved insurance policy from ECA in own country, exporter may feel free to deliver goods to Ukrainian customer under condition of deferred payment, as all commercial and non-commercial risks of goods delivered, ECA takes upon itself. In some cases due to economic instability, wrong finance planning, increase of receivables or global crisis, importer can not pay for delivered goods. In this case exporter usually considers one option out of all possible measures: adjust planning for offset of debts with customer or, if it’s not possible or such plan is not being fulfilled by customer, apply to ECA directly in order to receive insurance money. In case when exporter does this, ECA relying on policy of insurance, usually compensates up to 85% of contract amount in case of commercial risk and up to 90% in case of non-commercial (political) one.
The way it works
Naturally, after receiving compensation from ECA, exporter usually has no claims to importer because from that moment the right to claim belongs to corresponding ECA. On receiving such right, ECA initiates the procedure of debt collection from Ukrainian importer. To fulfill this task ECA usually involves its specialists in country of customer’s residence or hire experienced legal consultants.
During and after the crisis, representatives of foreign ECAs more and more often apply to experts from IBcontacts in order to get help in settlement of issues with problem debtors from Ukraine. Nowadays IBcontacts is a trustee of more than ten foreign ECAs in the sphere of Ukrainian trade companies’ debt management. Thus, IBcontacts experts have to be intermediaries between foreign ECAs and Ukrainian companies that can not pay for delivered goods due to objective reasons. In such cases our specialists structure debts and offer solutions, optimal for both sides: credit corporation gets its money and Ukrainian company saves its reputation.
Number of Ukrainian companies that have debts on international contracts, keeps increasing. According to official information that IBcontacts received during cooperation with German export credit agency Euler Hermes, in 2009 exporters that deliver goods to Ukraine received EUR 414mln of insurance money all over the world. In 2010 this amount increased to EUR 447mln. Due to default of payment from Ukrainian customers in 2009 foreign exporters received EUR 12,6mln on commercial risks. In 2010 it was EUR 15,1mln. After first half of 2011 this amount reached EUR 11,5mln. Remarkable that major part of further collections in 2010 Euler Hermes performed from Ukrainian debtors (EUR 29,2mln). Egypt is second in this rate, then Canada and Korea.
Legal proceedings: yes or no?
It’s worth to mention that usually contracts for goods delivery to Ukraine, according to which exporter and then ECA will claim for payment, are not duly composed if composed at all. There is no secret that a lot of Ukrainian companies work through offshore: exporter’s invoice is sent, goods are delivered and after that anything can hardly be trailed.
Some may think that collecting of such debts from Ukrainian customer is impossible. But this is not always the ultimate aim of an ECA.
In 90% of cases the most desirable for ECA result is peaceful settlement of issue, namely, voluntary offset of debt by customer. This is beneficial both for ECA and exporter. In this case ECA saves time and money that could nave been spent for legal proceeding. Anyway, ECA has a really efficient tool of influence on importer: closure of credit lines for deliveries to this importer (it means refusal in insurance of export deliveries to this customer) as well as escalation of concomitant reputational and market risks for debtor company on international level.
In case of refusal to pay off the debt to ECA all credit lines for deliveries to this debtor in offices of ECA worldwide are closed automatically. According to our practice, every ECA has information exchange system among its offices concerning debtors and reaction on refusal to settle the debt is fast. As a result, present and prospective suppliers either decline cooperation with debtor or continue only under conditions of complete prepayment. Such case happened to one of Ukrainian companies: all credit lines for deliveries to this company were closed in all offices of one of the biggest ECAs in the world. This resulted from non-payment of the debt, which had been paid to supplier by this ECA.
Sophisticated reader may object that consequences are not dramatic for importer: it still has an opportunity to avoid debt pay off and if documents are not duly prepared he is not the one to blame in anything. But this is also not true. ECAs from different countries also exchange information via such international organization as the Berne Union. Having received information about non-payment, ECA can easily spread it among either ECA acting within the same framework or other suppliers. As a result, even one non-paid debt can make company isolated on international market or force it work only under conditions of full pre-payment. The latter is rather disadvantageous for importers, particularly if considerable amounts of money are involved. In order to avoid this, importers prefer to settle the debt even by installments and with few years of delay. And this is the main goal of ECA. Entering to international market will be limited for those who refuse to pay or negotiate.
Simple statistic proves that mentioned tools are really effective. According to Dutch ECA Atradius, in 2010 exporters all over the world received EUR 78,6mln of insurance payments, and it’s not bad in comparison with post crisis 2009, when ECA in the Netherlands had to compensate EUR 225mln. Ukraine’s share in these payments was EUR 4,6mln. Even here Ukraine is the third in top-list. Pursuant to ECA data, the biggest part of compensations concerned deliveries to UAE, Mexica, Ukraine, and Kazakhstan. But this Export Credit Agency managed to collect significant amounts of money from debtor-companies: EUR 131mln in 2010 and EUR 180mln in 2009.
The importance of process and result
When speaking about the very collecting process, it starts identically for both ECAs and exporters: holding negotiations with debtor’s representatives, searching for possibility to develop and sign the plan of debt settlement. If negotiations process is being procrastinated and obviously leads to nowhere, delivery documents are not in due form, that means closure of all credit lines and spreading of information about importer’s insolvency among other ECAs and suppliers. So debtor finds oneself isolated on international market. In this case even legal process is not excluded: evidence collection is just a matter of time.
But if it’s possible to prove the fact of delivery (70% of causes as practice shows) exporter or Agency will not wait: usually after 3-6 months of ineffectual negotiations they will submit a claim either to appropriate economic court in Ukraine or to international arbitration. For example, Euler Hermes, one of the biggest Export Credit Agencies in the world, yearly processes about 200000 claims concerning debt collection worldwide. That’s why they are well-trained and ready to shoot the works. Finally, if debtor have no opportunity or desire to pay off, it will only be right to put him into “quarantine” by sharing information about its financial instability.
The other side
But let’s not forget about cases when ECAs do not pay insurance to exporter and do not get rights to demand pay off. This happened when exporter’s delivery contract is not duly composed or does not exist at all. Thereby, risk of non-payment and corresponding right to demand pay off belongs to exporter and his task is to collect money from dishonest customer. Cases of “negligence” of exporters do not belong to commercial risks, according to Agencies which refuse to compensate because of long time, necessary to collect evidence. In addition, claim is to be proceeded in importer’s residence country and this also holds certain risks. This has to be taken into account by Ukrainian exporters when Export Credit Agency will be established in Ukraine and their financial risks will be subject to insurance in accordance with draft law #9373 “On state financial support of export”, lately submitted for parliament’s consideration.
But ECA do not give up on friends: even if risk of non-payment is assigned to the seller, Agencies efficiently assist on payments collection from Ukrainian importers through active negotiating and mailing. As mentioned above, ECAs are ready to apply ultimate measures such as closing of credit lines for deliveries of this customer in all the offices worldwide and, moreover, spreading information about insolvency on market. These measures are appropriate for exporter as well for he has nothing to lose: in case of non-settlement of the debt cooperation will not last. From our experience, such case took place in post-crisis 2009 when few Ukrainian companies working on food market did not pay to foreign suppliers. At that time delivery contracts were not duly drawn and it was the reason why Export Credit Agency in exporter’s country refused to compensate. There is certain logic: ECA can not be responsible for supplier’s carelessness in paper-work. Anyway, the reason is non-willingness of Agency to undertake legal processing in Ukraine for this, generally, is not its main task. So exporter has to demand payments from customer by himself. But ECA assists him briskly.
It’s also important that sometimes significant share of some goods market (50-70%) belongs to 5-7 companies and affiliated persons. In case of non-payment to foreign partner or ECA, information will spread fast among local market players. In Ukraine usually rumors about debtor’s bankruptcy follow. Naturally, all this has a deep impact on importers’ reputation, and its image on international capital market will never be the same as it used to be before non-paid debt came into existence.
Though, there is no way of thinking that in case of debt, relations between ECA and importer are hopelessly ruined. Agency and exporter are always ready to make steps forward and go to any lengths to help debtor in paying off his debt. Even if matter had been taken to the court. Moreover, in IBcontacts’ practice there are cases, when debtors, after debt settlement according to plan of debt restructuring, successfully attracted export finance cooperating with the same suppliers and ECA, which used to be their lenders. Anyway, reputation, trust, and honesty of sides are key factors in international commerce.
Author: Oleg Dorofeev,
Head of Legal Department,