Export

Credit Management, Nov 2008 by Posner, Martin

Iceland - the iceberg wrecks the Titanic

In the Wall Street Crash of 1929 it took some time for the full impact to develop. Today we are seeing governments guaranteeing their citizens' deposits within hours of a financial institution reporting a lack of liquidity. The Icelandic banking crisis shows how relatively small banks can risk funds deposited by UK local authorities and individuals. Iceland has a population of around just 300,000 and it therefore cannot increase its GDP to create immediate reserves.

One Icelandic company, Baugur, has built up a significant stake in some British retailers. On 10 October, Coface announced that it had withdrawn cover for suppliers to several Baugur-backed retailers as the situation in Iceland deteriorated. Cover was withdrawn due to the slowdown on the UK high street as well as the crisis in Iceland. Coface, Euler Hermes and Atradius had also said they would not cover suppliers to Woolworths, in which Baugur had built up a 10% stake, while Coface also said it would not cover suppliers to JJB, 29% of which is owned by Exista, the Icelandic investment company. At the time of writing, just two days later, Philip Green was closing in on a deal on Baugur's interests in what was being described as a 'fire sale' while other UK investors, including Sir Alan Sugar, were pursuing similar paths.

Peter Mandelson - third time lucky ...

BERR, the Department for Business Enterprise and Regulatory Reform recently announced the names of Ministers and their new responsibilities under Peter Mandelson. My only comment on Peter Mandelson was that when he previously undertook the role of Trade Minister at the DTI, he just lasted five months. He visited the USA and after just three days he decided that it would be a good idea to allow UK entrepreneurs who had been declared bankrupt to be able to reapply for discharge after one year instead of three years. No wonder his recent statement included the line: "I am delighted to be Secretary of State for BERR. It will be a great opportunity and a great challenge." It was interesting to note that civil servants cheered him when he was appointed.

Ian Pearson MP is Economic and Business Minister (jointly with HM Treasury). He takes responsibility for Export Controls and the ECGD, as well as for many critical business sectors such as aerospace and pharmaceuticals.

Gareth Thomas MP is Minister for Trade, Investment and Consumer Affairs. This is a shared BERR/DfID responsibility. However he also has EU competitiveness and the Single Market, Services Directive, Consumer Affairs and Competition issues. Now that Digby Jones has resigned, I just wonder how much time this new Minister will be able to devote to export promotion and inward investment?

Atradius - news on available cover

In September 2008, Shaun Purrington, the Regional Director of Atradius UK, said to his policy holders, "You can be assured that we will continue to support you through your credit insurance, and provide realistic and sustainable levels of cover. We trust that through a combination of the sensible cover, practical advice and accurate information that we provide, we will help you to adjust to a very different business environment. And, as always our recoveries experts will always assist in finding ways to mitigate loss, as part of the Atradius promise."

Atradius says that it is still taking on new policyholders for domestic and overseas trade. Underwriters are still agreeing new limits for existing policy holders and the company's claims department is paying claims promptly.

USA - As the USA is still our biggest single export market, I spoke to Atradius's spokesman in Amsterdam who deals with the US markets. Commenting on the commercial and retail conditions in the USA, he said that "the entire commercial and domestic economy will be affected."

Corporate defaults and insolvency in the USA - A recent Atradius report includes the following information:

The Expected Default Frequency is the probability that a firm will default in a different time horizon. The EDF shown in the following graph refers to listed companies measured across one year's risk. Default is defined as the failure to make a scheduled payment or the initiation of bankruptcy proceedings.

A public firm's probability of default is calculated from three drivers; the market value of its assets, its volatility and its current capital structure. The EDF is interpreted, as with any probability, as the expected frequency. For example, on average, one out of each hundred firms with EDF credit measure of 7% will default within a year.

The graph above shows the median level of expected default frequency for listed US companies across all sectors, and it can be seen that this has increased from 1 1 basis points in June 2007 to 36 basis points in June 2008.

Of the major industries, construction, services, consumer durables, transport and chemicals show a higher risk than they did previously. The increasing trend of corporate defaults (or further deterioration in corporate credit quality) puts pressure on derivatives markets. This may trigger another round of losses.