Collarspace Discussion Forums


Home  Login  Search 

restoring creditworthiness to the market?


View related threads: (in this forum | in all forums)

Logged in as: Guest
 
All Forums >> [Community Discussions] >> Dungeon of Political and Religious Discussion >> restoring creditworthiness to the market? Page: [1]
Login
Message << Older Topic   Newer Topic >>
restoring creditworthiness to the market? - 7/18/2010 11:36:53 AM   
LadyEllen


Posts: 10931
Joined: 6/30/2006
From: Stourport-England
Status: offline 		Covering your own debt?

A scenario for the clever types here to comment upon.

Now its not possible to buy insurance to cover your own default on debts you owe to others. The rules of insurance mean that your creditor can buy such insurance against your default, but you cant insure yourself so that if you don’t pay your creditor, then your insurer will pay your creditor.

In a post-crash market where suspicion over the creditworthiness of customers is rife, extending even to credit insurance companies refusing to provide credit insurance in respect of accounts receivable, there is a serious problem in that companies’ fear of extending credit and the unavailability of debtor insurance is limiting economic activity and recovery.

So, could third party guarantors be brought in to reinvigorate the situation?

If company A wants to buy $50,000-00 worth of widgets from company B on credit and company B cant get credit insurance in respect of company A and so wont supply – company A being unable to pay cash – could company A make the deal work for company B by bringing in a guarantor, third party C?

Company A would pay a premium to third party C, such that if company A defaults on its payment for the widgets to company B then third party C will pay company B. Company A discloses the guarantor arrangement to company B and indicates the entitlement of company B to payment in the event of default by company A. As long as company B has faith in the third party C then it ships the widgets.

If company A now defaults, company B gets paid by third party C. If company A pays up within terms then third party C makes a profit on the deal from the premium paid by company A.

Third party C of course might wish to hedge against the default of company A by making a similar arrangement with another party D, whereby C will pay a premium to D to cover say half his losses if company A defaults and C is called on to pay company B. D might do something similar with party E.

Questions
1)      is this not a credit default swap situation?
2)      Is this legal and likely to remain legal?
3)      Can anyone arrange such deals for their own company or for a third party or is some sort of licensing required?

The usefulness of such arrangements in my field, European road transport, would be immense. The nature of service industries like mine – where most debtors have few assets to recover against and a service delivered can hardly be recovered by a creditor in the same way as goods might be – is that we have been hit hardest by the withdrawal of credit insurance cover from the market; subcontractors are reluctant to take contracts from other freight companies, never knowing who might be next to fall insolvent (and leave them out of pocket) and not being able to get insurance on the debt they are owed.

We cant insure what we owe to a subcontractor, but if we could arrange something along the lines of the above – perhaps with a bunch of other freight companies so effectively we each guarantee a little of one another’s debts to subcontractors, diluted to negligible effect if one of us becomes insolvent and we have to pay the subcontractors of the failed participant – then we might restore confidence in taking the contracts we have on offer, get the economy going and retain employers and jobs in the sector.

Be interested in helpful informed replies. Not so interested in how credit default swaps brought down the west, which has been done to death already.

Thanks

E

_____________________________

In a test against the leading brand, 9 out of 10 participants couldnt tell the difference. Dumbasses.
Profile   Post #: 1
RE: restoring creditworthiness to the market? - 7/18/2010 2:10:27 PM   
DomKen


Posts: 19457
Joined: 7/4/2004
From: Chicago, IL
Status: offline 		Doesn't Lloyd's provide such insurance? If not they are the ones to ask since the rules governing what Lloyd's can insure is much looser than US insurance and financial regulations.

(in reply to LadyEllen)
Profile   Post #: 2
RE: restoring creditworthiness to the market? - 7/18/2010 9:19:57 PM   
DCWoody


Posts: 1401
Joined: 10/27/2006
Status: offline 		I imagine it's legal, but....doesn't seem very sensible. A Paying out more to C would only increase the chances of them being unable to pay B, if B wanted Cs guarantee....they'd buy it themselves, as they do. Seems to me if C wouldn't insure B against A failing, they'd end up charging fuckloads to A for the same. And what happens when A collapses...C doesn't pay out because A [wa/is]n't keeping up payments.

Ya could ring C and ask, but...I can't see it being economic.

When you go onto getting your industry to insure itself, rather than a traditional C....that could work. See if your competitors are interested I guess. But have to have a firm way of deciding whether or not to allow a company to join the scheme.

tl;dr - I dunno, consider this unhelpful ignorance.

(in reply to DomKen)
Profile   Post #: 3
RE: restoring creditworthiness to the market? - 7/18/2010 9:24:50 PM   
TheBanshee


Posts: 403
Joined: 7/19/2007
Status: offline 		it kind of sounds like a pyramid game in theory

(in reply to DCWoody)
Profile   Post #: 4
RE: restoring creditworthiness to the market? - 7/18/2010 9:25:17 PM   
DarkSteven


Posts: 28072
Joined: 5/2/2008
Status: offline 		Why?

Take the fraudsters that assigned triple A ratings for junk, and nail them to the wall.

We need to make the current system work the way it's supposed to, not add extra layers of weirdness to it.


_____________________________

"You women....

The small-breasted ones want larger breasts. The large-breasted ones want smaller ones. The straight-haired ones curl their hair, and the curly-haired ones straighten theirs...

Quit fretting. We men love you."

(in reply to DCWoody)
Profile   Post #: 5
RE: restoring creditworthiness to the market? - 7/19/2010 12:31:06 AM   
willbeurdaddy


Posts: 11894
Joined: 4/8/2006
Status: offline 		I must be missing something in the OP. There is no difference that I can see in this scenario vs what happens now...B buys credit insurance on its accounts receivable from C and charges A for it, either explicitly or as part of the price of the widgets.

(in reply to DarkSteven)
Profile   Post #: 6
RE: restoring creditworthiness to the market? - 7/19/2010 2:16:39 AM   
joether


Posts: 5195
Joined: 7/24/2005
Status: offline 		I've tried to answer this three times, and each time, it just doesnt sound correct.

There are missing variables to this equation, of the OP's. What sort of size, are the companies? What industries? Why cant Company A find alternative funding that is alittle more sane and less 'shady' (i.e. unethical and/or illegal)? What is Company C's motivation to take on this gamble, give that Company A, doesn't have real assets?

There is an idea here, but I am just not understanding it.

(in reply to willbeurdaddy)
Profile   Post #: 7
RE: restoring creditworthiness to the market? - 7/19/2010 4:12:47 AM   
LadyEllen


Posts: 10931
Joined: 6/30/2006
From: Stourport-England
Status: offline 		B cant get credit insurance in respect of A, because insurers have decided to take their ball home. A cant borrow the funds because bankers either wont lend or want ridiculous interest rates.
B doesnt want to extend credit at all to anyone, not just A.
A cant insure himself against his own default because the asset to be insured is the account receivable by B in which A has no interest. You cant take out fire insurance on your neighbour's house in other words.
A cant pay cash for the widgets because he doesnt have the cashflow to do so; like most other companies he has funds in and out each month and a small surplus. If he paid up $50k in one go he'd get the widgets but would be cashflow insolvent and out of business before he got paid for them when he sells them on.

So A is looking for someone to guarantee his payment to B, so that B will ship the widgets.
If A pays B then guarantor C will have received a commission for his trouble.
If A fails to pay B then guarantor C will be called on to pay B.

A goes to his bank - they will provide a guarantee alright, but only if A deposits $50k, which of course he doesnt have in the first place and if he did would use it to buy the widgets, not sit in a suspense account at the bank.

A finds a trader T who will act as guarantor. A pays a commission to T based on what T thinks the risk is of A failing to pay B.
T looks at A and thinks its a reasonable bet that A will pay B so charges A 5%, $2500-00, to stand guarantor. T could just as easily charge more or less or even refuse the arrangement altogether if T thinks A is very risky indeed.

T then finds X who is in the same business and gives X half the commission from A to stand guarantor for T on half his potential losses. If A now doesnt pay B then T will pay B, recovering half what he pays B from X. The same could happen as many times as one could dice up the commission from A, so that no one party gets more than a small amount of the commission but no one party stands to have to contribute more than a few dollars if A should default.

This isnt insurance because its not focussed on the asset and the owner of that asset (the asset is the account receivable and the owner of that asset is B). This is all necessary because insurers wont provide debtor insurance any more.

E

_____________________________

In a test against the leading brand, 9 out of 10 participants couldnt tell the difference. Dumbasses.

(in reply to joether)
Profile   Post #: 8
RE: restoring creditworthiness to the market? - 7/19/2010 8:59:06 AM   
willbeurdaddy


Posts: 11894
Joined: 4/8/2006
Status: offline
quote:

ORIGINAL: LadyEllen

B cant get credit insurance in respect of A, because insurers have decided to take their ball home. A cant borrow the funds because bankers either wont lend or want ridiculous interest rates.


But C is an insurer that hasnt taken its ball home in your scenario. It would prefer to get its premium paid by B on its A/R, because that naturally spreads its risk over all of B's customers.

(in reply to LadyEllen)
Profile   Post #: 9
RE: restoring creditworthiness to the market? - 7/19/2010 9:44:16 AM   
LadyEllen


Posts: 10931
Joined: 6/30/2006
From: Stourport-England
Status: offline 		C isnt an insurer - insurance is unavailable so we have to look at how A might "insure" his own default - and its not possible to insure something (ie the debt due to B) if one has no insurable interest so A has to look for some form of guarantee for B that isnst going to cost him a fortune.

E

_____________________________

In a test against the leading brand, 9 out of 10 participants couldnt tell the difference. Dumbasses.

(in reply to willbeurdaddy)
Profile   Post #: 10
RE: restoring creditworthiness to the market? - 7/19/2010 11:49:11 AM   
willbeurdaddy


Posts: 11894
Joined: 4/8/2006
Status: offline
quote:

ORIGINAL: LadyEllen

C isnt an insurer - insurance is unavailable so we have to look at how A might "insure" his own default - and its not possible to insure something (ie the debt due to B) if one has no insurable interest so A has to look for some form of guarantee for B that isnst going to cost him a fortune.

E



quote:

Company A would pay a premium to third party C, such that if company A defaults on its payment for the widgets to company B then third party C will pay company B.


Those two statements are inconsistent. C is clearly an guarantor or insurer in the second quote, from the OP.

< Message edited by willbeurdaddy -- 7/19/2010 11:50:07 AM >

(in reply to LadyEllen)
Profile   Post #: 11
RE: restoring creditworthiness to the market? - 7/19/2010 12:24:17 PM   
Musicmystery


Posts: 30259
Joined: 3/14/2005
Status: offline 		Elllen, another factor to consider--there's a difference between what CAN be insured and what is financially reasonable to insure.

A good example is pet health insurance. While its certainly available, it's premiums equal what I pay for pet health care, including emergencies, so I pay out of pocket instead.

A lot of markets work this way to their detriment when this is ignored. In the 80s I had three nationally distributed independent albums. I advertised in their catalogs because it drew attention to my product. Then, as the market grew, distributors decided to charge (they used to offer it free to boost their own sales) more and more and more for advertising, to the point that I would essentially be buying my own product--fine if I just want it out, I suppose, but pointless if I'm working for nothing. In my case, I saw the writing on the wall and made career changes. The distributors were now not in the business of selling albums, but selling advertising to independent artists. Without that end market result, the ability to furnish even greater sales for my advertising dollar, it just no longer made sense.

The wide-spread belief that there's nothing wrong with copying didn't help either. It was time to seek income elsewhere, despite the success of the albums in terms of distribution.





< Message edited by Musicmystery -- 7/19/2010 1:15:21 PM >

(in reply to LadyEllen)
Profile   Post #: 12
RE: restoring creditworthiness to the market? - 7/19/2010 12:53:59 PM   
willbeurdaddy


Posts: 11894
Joined: 4/8/2006
Status: offline
quote:

ORIGINAL: Musicmystery


A good example is pet health insurance. While it's certainly available, it's premiums equal what I pay for pet health care, including emergencies, so I pay out of pocket instead.






And the only difference between human and pet health care is the demand relationship/elasicity. Neither one is insurable except for catastrophic non-routine events. Everything else is just adding a layer of adminstration between provider and buyer.

(in reply to Musicmystery)
Profile   Post #: 13
RE: restoring creditworthiness to the market? - 7/19/2010 1:21:40 PM   
Musicmystery


Posts: 30259
Joined: 3/14/2005
Status: offline 		There's one other difference--cost.

I had a black lab with a small tumor. Biopsy, second opinion (same place, I admit), total treatment (benign)--$56.

For fun, I researched and wrote about what this would cost an adult human. At the time, over $5000.

I asked a surgeon acquaintance about the reason. His reply: "Because in the history of veterinarian medicine, no black lab has every sued for malpractice."

(in reply to willbeurdaddy)
Profile   Post #: 14
RE: restoring creditworthiness to the market? - 7/19/2010 1:26:02 PM   
willbeurdaddy


Posts: 11894
Joined: 4/8/2006
Status: offline
quote:

ORIGINAL: Musicmystery

There's one other difference--cost.

I had a black lab with a small tumor. Biopsy, second opinion (same place, I admit), total treatment (benign)--$56.

For fun, I researched and wrote about what this would cost an adult human. At the time, over $5000.

I asked a surgeon acquaintance about the reason. His reply: "Because in the history of veterinarian medicine, no black lab has every sued for malpractice."


All cost does is change the definition of "catastrophic". The insurability elements are unchanged.

Interesting answer from the surgeon in light of claims during the reform debate that malpractice costs were an insignificant element of cost so tort reform isnt worthwhile.

(in reply to Musicmystery)
Profile   Post #: 15
RE: restoring creditworthiness to the market? - 7/19/2010 1:26:52 PM   
joether


Posts: 5195
Joined: 7/24/2005
Status: offline 		I think I understand what Lady Ellen is asking. It just is confusing concept. Lets make these easier on the brains...

Company A, wants 'M' widgets from Company B. Company A, does not have the total amount, in cash, at time of purchase or delivery, when Company B delivers the product/service. Normally, Company B, would withhold the product, until it got its money from Company A. So, Company A, finds a third company, Entity C (cus I'm getting confused between the businesses...new word, new entity). Entity C, will cover the transaction of Compan A, in the event, the product/service is delivered, but Company A's cash-flow is not enough to cover.

a) This would mean, Company A pays up to, what it can cover, and Entity C, enters the remaining amount. Company A, would, in this case, behave as a loan to Entity C, for the amount draw on account, plus a goverment approved interest (to avoid loan sharks). The loan is paid to Entity C over time, Company A gets its widgets, that hopefully will pay Entity C off quickly, and Company B gets paid on time.

This method is actually in use, here in the USA. Working with the Small Business Administration (SBA), many companies can secure a line of credit, to be tapped when needed. There are requirements, the loaner agency would have, like: 1) An upper limit 2) 'In the Loop' on transaction type and repayment method/time 3) Current stability of the company drawing funds.

b) If Company A, could not aquire, 'option a' above, it would have to either, find another source for the widget that was cheaper by the unit, or work with smaller orders with Company B.

c) Company A, could employ a business concept, called 'Just in Time' logistics. The US Auto Industry uses it, as do several other manufacturing industries. Supplies come in, and the supplier paid at the time of the transaction (or shortly there after). The amount of supplie, is considerably smaller in number to 'one shipment', but broken in to smaller peices, deliver just before Company A's manufacturing proccess runs out of supplies of the widget from Company B. Warehousing is kept to a minimium, and a deliver schedule is mantain in the interests of both companies.

d) Finally, Company A, could consider, taking the manufacturing of the widget, that Company B produces, 'in house'. While this would present a different sent of challenges to over come, it could work for Company A in the long term.

Are any of these, what you are driving at, Lady Ellen?

(in reply to willbeurdaddy)
Profile   Post #: 16
RE: restoring creditworthiness to the market? - 7/19/2010 1:34:50 PM   
willbeurdaddy


Posts: 11894
Joined: 4/8/2006
Status: offline
quote:

ORIGINAL: joether


a) This would mean, Company A pays up to, what it can cover, and Entity C, enters the remaining amount. Company A, would, in this case, behave as a loan to Entity C, for the amount draw on account, plus a goverment approved interest (to avoid loan sharks). The loan is paid to Entity C over time, Company A gets its widgets, that hopefully will pay Entity C off quickly, and Company B gets paid on time.



And this is equivalent to a factoring arrangement between B and C, the essence of which is C being a guarantor, which E is trying to distinguish from what she intends.

(in reply to joether)
Profile   Post #: 17
RE: restoring creditworthiness to the market? - 7/20/2010 2:42:52 AM   
LadyEllen


Posts: 10931
Joined: 6/30/2006
From: Stourport-England
Status: offline 		C is not an insurer; A cant insure his own default and credit insurance is generally unavailable to B
C is not a lender; A cant borrow or can only borrow at crazy interest rates
C is not a factor; A cannot draw down funds on a purchase - if B factors his invoice on A with C and then A does not pay then if C were a factor he would look to B to repay any funds advanced to B so this does not help B with his decision re A.

This is the essence of the problem - no where to turn in the normal run of things. For that reason I'm suggesting that if C were willing, for a fee, to guarantee the debt owed by A to B for the widgets then A gets his widgets and B is assured of payment. This isnt insurance since the asset (the debt) is owned by B, not by A who is the one acting here.

This is a creditor default arrangement not a debtor insurance arrangement.

E



_____________________________

In a test against the leading brand, 9 out of 10 participants couldnt tell the difference. Dumbasses.

(in reply to willbeurdaddy)
Profile   Post #: 18
RE: restoring creditworthiness to the market? - 7/20/2010 7:35:13 AM   
pahunkboy


Posts: 33061
Joined: 2/26/2006
From: Central Pennsylvania
Status: offline 		Quite whining.

You like this system.  You ADORE it.

(in reply to LadyEllen)
Profile   Post #: 19
Page:   [1]
All Forums >> [Community Discussions] >> Dungeon of Political and Religious Discussion >> restoring creditworthiness to the market? Page: [1]
Jump to:





New Messages No New Messages
Hot Topic w/ New Messages Hot Topic w/o New Messages
Locked w/ New Messages Locked w/o New Messages
 Post New Thread
 Reply to Message
 Post New Poll
 Submit Vote
 Delete My Own Post
 Delete My Own Thread
 Rate Posts




Collarchat.com © 2025
Terms of Service Privacy Policy Spam Policy

0.094