Protect high-risk accounts receivable on a single-account, non-cancelable basis
Replace or supplement trade insurance and factoring arrangements
Realize revenue projections and increase market-share
Maximize borrowing capacity
Risk Protection: Which customer is keeping you up at night?
You hear the rumors swirling throughout the industry. You have a customer who is in financial straits or is operating in bankruptcy. According to the latest outstanding accounts receivable report, they owe you considerable money on open invoices, or your company is planning additional sales to this customer.
Even though the best time to assess your supplier protection options is before you start losing sleep, you still have credit options:
Alter credit terms, tightening the line of credit, (but risk damaging years of goodwill) OR
Retain trade receivable insurance (which will need to cover all your accounts receivables and will be cancelable at the will of the insurer) OR
Find a factoring solution (unless your insurance company or factor determines the account is too risky and terminates coverage, or cancels your policy) OR
Attempt to access the credit derivatives market…if you dare to risk having the perfect hedge OR
Contact ETG for a Put Option, a flexible and reliable protection option
For more Put Option strategies to protect high-risk accounts receivable, read our Case Studies.
Revenue Generation: Use ETG's Put Options to increase market-share
You are doing business with a distressed company and your company is shipping $500,000 of goods per month. You are comfortable with the credit limit, but Sales is telling you, “We could be doing $1MM dollars a month instead!”
With an ETG Put Option you can push the envelope and gain market share while protecting the excess exposure, a win-win for Credit and for Sales.
Tawil and Azarbad’s retail industry client increased annual sales with a particular customer by $250 million (starting from zero) by selling to the customer when no one else would. They put a Put Option in place to hedge their credit risk.
A client/supplier distinguished itself by offering a customer more liberal terms (60-day credit terms rather than net-30 days). In return for better terms, ETG’s client received increased orders and premium shelf-space in its customer’s stores.
For more Put Option strategies to gain market share, read our Case Studies.
Once accounts receivable become risky, they typically are excluded from a supplier’s line of credit. Put Options can typically restore those receivables to a supplier’s borrowing base.
For example, if you have receivables against one of the Big-3 automobile manufacturers, and your lender becomes concerned, the lender will inform your company that the accounts receivables from the auto manufacturers are no longer eligible as part of the “borrowing base”.
However, if your company secures those accounts receivable with a Put Option, the bank will put them back in your borrowing base. A Put Option protects your accounts receivable, along with the ability to borrow.
For more Put Option strategies for safeguarding borrowing ability, read our Case Studies.
For Companies referring suppliers to ETG for Put Options
Relieve supplier pressure
Increase bank-line availability
In a stressed financial scenario, it becomes even more critical that a company maintain normal operations and not further erode cash flow and liquidity. Companies can utilize Put Options strategically with their suppliers to achieve specific objectives:
Request resumption, maintenance or extension of credit terms from all suppliers whether critical or not. If a supplier reacts negatively to a credit request, the company can suggest that the supplier contact ETG for a Put Option.
Replace existing letters of credit with a Put Option solution. Reducing the amount outstanding under a Letter of Credit facility increases liquidity and bank-line borrowing availability
Offer Put Options to critical vendors.Put Options used to satisfy critical vendors (i.e. notoriety, size or otherwise critical in nature) to restore normal trade-terms may be put in place confidentially. Smaller vendors often respond in kind because they follow the market leaders (and will typically do so, without additional assurances)
Offer Put Options at critical times. ETG’s Put Options are available for shorter terms than solutions available from other sources, making Put Options an ideal remedy for seasonal spikes.
Relieve Supplier Pressure
Managing supplier concerns can be a time intensive and costly undertaking that distracts the company’s attention from other critical matters. Promote Put Options to those vendors that are resistant to accepting desired trade terms.
With Put Options, your suppliers will supply more inventory on open-credit. With more inventory, your company will have access to more borrowing power under your bank credit line.
ETG's Put Options Compared with Credit Default Swaps
The following may be more detail than you wish to know about Credit Default Swaps (“CDS”).
Credit Default Swaps in general are instruments that transfer the risk of default on a particular security (usually a bond, note or loan) from the buyer of the CDS to the seller of the CDS; the buyer of the CDS buys protection and the seller of the CDS sells protection.
As a matter of fact, to have a CDS, an underlying company (the issuer or debtor) must have a reference obligation (a bond, note or loan). The CDS market is not as robust as many may think. Credit Default Swaps exist on many large, liquid companies (e.g. Ford, JPMorgan Chase, The New York Times Co.), but do not exist on the overwhelming majority of public companies.
ETG’s Put Options are more tailored than Credit Default Swaps (“CDS” or “credit derivatives”):
ETG Put Options
Accounts Receivable Hedge
References supplier’s receivables
Coverage on bonds and loans; NOT supplier’s accounts receivable.
Any public company, many private entities, any industry.
Only available on certain publicly traded companies.
No minimum amount to protect.
In $2MM increments.
Nonconforming coverage is normally not available.
A range of tenors—typically from 3 months to 5 years.
Coverage typically available only at 3 and 5 years.
No ISDA agreement.
Direct settlement with ETG Capital.
Requires a negotiated and executed ISDA agreement.
Settlement via a dutch-auction.
Available before bankruptcy and during bankruptcy.
Only available before bankruptcy.
Can be structured to protect sale-price (with your profit), or to cover only cost of goods sold.
Often requires large cash outlay (“points up-front”) especially in distressed situations.
Only available for par protection on bonds and loans, not supplier’s accounts receivables.