A partnership geared towards innovation
Banks are increasingly looking towards non-bank financial institutions to engineer integrated solutions for clients. The link-up between Natexis Banques Populaires and Coface UK emphasises this trend. Raj Andersson reports
All major banks have been struggling to deal with regulatory changes such as Basel II while coping with the downward pressure on margins. Many have responded by taking the client relationship aspect to a new level, where traditional forms of finance are only part of the package. The
- London branch of Natexis Banques Populaires is no different. Yet with respect to trade finance, its drive to provide integrated solutions for its clients is being aided by the presence of Coface – its 100% subsidiary.
Coface, with its worldwide credit management operations, was bought by Natexis Banques Populaires in 2002 – creating a unique model, at least for the trade finance arena. The bank now has its own in-house credit insurer and – after a period of consolidation – the advantages of such a set-up are starting to become apparent, although Rodney Ballard, head of structured finance at Natexis Banques Populaires in London, is keen to stress that they operate as separate legal entities.
“Confidentiality remains the key to all our dealings, as it does with Coface UK,” says Ballard. “And although we are very much aware of the benefits that working closely with Coface UK can have when coming up with tailor-made solutions for our clients, Chinese walls are in place to ensure that each entity acts independently.”
Such independence means that Coface UK offers its services to the entire market and Natexis Banques Populaires expects no favourable terms for charges. However, Ballard is intent on utilising the relationship to provide innovative solutions that combine the strengths of the two different offerings.
“A key area will be funding,” says Ballard. “There are currently a number of deals that are being worked upon, with Natexis Banques Populaires as the provider of funds to Coface UK for their transactions.”
This is highlighted by the solution that Coface UK provided to European Colour. Coface UK drew on its network to enable European Colour to make inroads in the South American market – a region it was struggling to penetrate. Coface UK opened up a market for European Colour by utilising its collection skills and by absorbing key risks.
“Countries outside of Europe and the US where we trade in US dollars are important growth markets for European Colour,” says Mike Quayle, finance director at European Colour. “Coface UK, with their knowledge of these countries, were able to provide the funding limits we required – in short the flexibility we needed. And their collection skills in South America are an important extra benefit.”
And while Natexis can offer Coface UK funding, Coface UK can return the compliment by increasing the bank’s capacity. The upcoming Basel II underlines the importance of capacity and credit quality issues for banks with Natexis Banques Populaires, like others, needing to create capacity while minimising bad debts. Certainly, the support of an in-house credit insurer with extensive market and company knowledge can help in this respect.
“Coface brings us wider and deeper credit limits for sure,” says Ballard. “Not least because their knowledge of the small to mid-cap sector is probably the strongest globally.”
Indeed, the substantial rise in supplier credit, and the speed required for the disbursement of such funds, is a challenge for banks that can take time in analysing and securing credit lines. This can lead to a situation where a bank’s lack of knowledge of its clients’s debtors results in clients being unable to secure bank funds, and with their working capital tied up with debtors. Yet by relying on the credit assessment and cover provided on buyers by Coface, Natexis Banques Populaires can work around this capacity constraint. Coface UK can provide insurance cover against default, with the client then assigning the policy to its bank and enabling the latter to finance the transaction.
“The use of a credit insurer can be very beneficial – especially if the client has credit lines consisting of a number of bank facilities, such as overdrafts, trade finance and bank guarantees,” says Ballard. “It allows the company to maintain its growth objectives while the bank continues to provide non-debtor funding.”
Expert information provides solid base
Another important element remains the breadth of information held in the Coface UK database. Such information can provide Natexis with a solid base on which to assess the credit worthiness of its clients’s debtors – building on the more traditional balance sheet and market analyses carried out by banks.
Due to its breadth of knowledge across sectors and markets, Coface has a database of over 44mn companies. And the insurer’s relationship with Natexis allows the bank to utilise this knowledge to offer loans to non-relationship mid-caps, as well as investment grade companies, through a credit assessment carried out by Coface UK. Indeed, Coface UK’s books have many BB rated companies that the bank can support.
With a Standard & Poor’s AA- rating, Coface also offers Natexis Banques the knowledge that in case of debtor default, the bank can count on the insurer to recoup funds. In an increasingly risk-averse banking environment, such a certainty remains a fundamental asset.
This access to global information is particularly helpful to the bank’s clients attempting to break into emerging markets such as China, India and Eastern Europe. Previously, the lack of precise credit information as well as the political risk in such markets often made it economically unviable to do business in emerging countries.
Now, however, Natexis can advise its clients to make use of the political risk cover available at Coface when dealing in non-traditional markets. This in itself provides the pair with an advantage when structuring solutions for their clients.
Although such general cover and ability to access finance – for example via invoice discounting – remain fundamental to the Natexis Banques Populaires/Coface UK partnership, the pair have moved up a step and worked on more complex deals. This is highlighted by the ‘secure route finance’s structure that was set up for Londesborough Finance Ltd (LFL) earlier this year – a first for both the bank and the credit insurer in the telecoms market.
LFL was looking for an on-demand bank guarantee to support its financial commitments to the seller – taken over from the buyer. It was also looking for an insurance policy to cover the payment risk from the originating customer. The deal structured was the first time a private credit insurer and a trade finance bank had co-operated in such a way to produce a tailored solution. It also offered a route for receivables financiers to tap the telecoms market – another first.
The integrated solution provided to LFL – the creation of a short-term receivables-based structure that also incorporates any inherent trade-flow risks – emphasises the need of certain companies to have access of non-conventional forms of finance. And both Natexis and Coface UK have jointly shown their willingness to meet such imperatives by being innovative.
Invoice discounting and the issuance of sureties is another possible area of cooperation between bank and insurer. Coface UK’s knowledge of buyers (and in particular the support it can give to exporters) means it can provide an invoice discounting service to its clients given its ability to access funds at a very competitive rate from Natexis Banques Populaires. This wins the client short-term finance directly from the credit insurer. It also helps build relationships.
In this respect, working with Coface UK allows Natexis to remove certain risks from the bank’s balance sheet. And with banks increasingly taking a prudent approach to risk, especially with the advent of Basel II, this is a trend that is bound to gather pace.
Sureties are another area of cooperation. In this case Natexis Banques Populaires has the possibility to transfer performance bonds to Coface UK and thus create space on its clients’ credit lines. Again, the advantages of bank and surety provider working together are clear. The client can access additional finance given that part of the facilities and any inherent risks are shifted onto Coface UK.
“Filling up bank credit limits with performance bonds is a potentially inefficient use of banking limits,” says Philip Amlot, senior manager, risk, at Coface UK. “Coface UK is a leading player in the sureties market and can purchase the bonds from the bank, freeing up credit limit for expansion-based lending.”
In most circumstances it is the clients that approach Coface UK, due to the fact credit limits have been reached and they are encountering problems winning further bank funding. However, the close relationship between Natexis and Coface UK means that the bank can proactively extend credit lines for its target clients.
Finally – and of increasing interest to companies – is the area of securitisation. In 2004 the Coface Enhanced Securitization of Accounts Receivables (Cesar) was introduced – aimed at offering a solution to those companies involved in the securitisation of trade receivables. By amortising fixed costs Coface’s option reaches out to mid-caps, thereby including smaller portfolios.
“Cesar is still mostly used in France and Germany,” says Coface UK’s Lars-Erik Granqvist, senior transactions manager at Coface UK, “although it is likely to make in-roads in the UK and elsewhere – especially given the increasing appetite of companies for alternative forms of finance.”
All in all, the trade finance bank/credit insurance model has some way to run, at least according to Coface UK and Natexis.
“Previously, banks would turn to credit insurers when the first major difficulties arose,” says Ballard. “However, by keeping an open communication line with Coface UK, Natexis Banques Populaires is now able to take a pro-active stance – ensuring a partnership approach at the outset of any deal. So far, the successes have encouraged both parties to continuously look at other possible areas of cooperation, with a momentum that has led each to look to the other as the preferred partner – especially when innovating. Certainly, for companies engaged in global trade or battling against a long debtor list, the combined efforts of Natexis Banques Populaires and Coface UK can provide them with the integrated solutions they require.”