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In February, Managing Editor Cyril Tuohy sat down with Mike Ferrante, CEO of Coface North America, to discuss the state of the U.S. trade credit marketplace. After several years of growth, the Great Recession of 2008-2009 caused trade credit insurers to pull back, leaving some clients in the lurch. Since then, new opportunities have arisen once more as sales improve for clients but banks remain tight-fisted with credit.

Q: The size of the trade credit market in North America is about $600 million, which is small compared with the $4 billion trade credit market in Europe. How much growth potential do you see in the North American marketplace?

Q: Coface North America hasn't made much in terms of acquisitions, but it has bought some smaller players in the nontrade credit business lines. What was the thinking behind that?

A: Our last pure trade credit acquisition was back in 2003. The universe of targets is fairly small. Prior to 2008 and the Great Recession, there had been more companies entering the trade credit market than there had been acquisitions. Houston Casualty and QBE, for example, entered the market, and those already in the market like ACE became more active.

Q: How do these new players and the revival of once-dormant players affect Coface?

A: In the United States, the challenge in the market isn't necessarily coming from competitors--though they are never to be underestimated. The major challenge is coming from the self-insurance. Trade credit in the North American marketplace is potentially a $4 billion market, which is roughly the size of the market in Europe. So there is really plenty of room for other players without anyone else suffering because of a slightly more crowded marketplace.

Q: How has the Great Recession affected the trade credit market?

A: In insurance terms it's like operating in a hurricane or other disaster. We saw people interested in buying coverage on weak companies at the height of the recession. This is similar to trying to buy fire insurance when smoke is coming out of the building.

Unlike property/casualty insurance, which could be required by law, statutory requirement or by other third parties such as banks, credit insurance is a discretionary purchase. What we find in a recession is that there is great interest in the product, but because companies are cutting expenses, adding a new insurance expense is difficult. Our real opportunity is at the end of a recession, when sales and revenues start to rise yet the credit environment is weak. Companies have made it through the toughest times, and recent credit losses are still fresh in their minds. In such an environment, the cost of credit insurance appears very reasonable. Demand goes up and budgets come back, so we see an acceleration not only in interest but actual purchase of the product as well. Are we quite there in terms of the cycle? Not quite, but we're closer to that point.

Q: Why did Coface N.A. make the past acquisitions that it did? What was it about those companies that made them attractive as takeover targets for Coface?

A: Coface is taking a slightly different tack than the rest of its competitors like Euler Hermes ACI and Atradius Credit Insurance Inc. We really view ourselves as accounts receivables managers, so we want and need to be experts in accounts receivable. If our clients want protection, we'll offer them insurance. If they want information, we offer them credit information. If they want collections, we offer them collections services. If they need financing, we offer them factoring services.

If you buy factoring, you get credit protection and collections services on top of the financing. If you want our services a la carte, you can buy insurance, collections or information services. Our competitors don't offer these kinds of services to the extent that we do.

Q: How about your distribution channel?

A: We sell through the big brokerage alphabet houses, along with the specialty credit insurance brokers and through a direct sales force--which is independent but exclusive to Coface. Our agents also work with commercial property/casualty and are able to explain credit insurance to their clients.

Q: Why are buyers so much more receptive to credit insurance in Europe than they are in North America?

A: Ironically, credit insurance started in the United States at the outset, with Euler Hermes ACI and Coface going back to the late 1800s. In Europe, it started to really take off back in the 1940s, after the war. It's important to realize that in Europe it is common for even a small company to be involved in cross-border trade, and credit insurance makes it easier to mitigate the risk of dealing with different languages, legal systems and trade rules. In addition, formal bankruptcies were much higher in Europe than in the United States. By comparison, the United States is mainly a domestic market. Firms with less than $200 million in sales don't typically have a large export portfolio, whereas in Europe firms below $50 million are more active exporters.

Also, many U.S. companies have had to rely on letters of credit, which can put them at a competitive disadvantage relative to companies in Europe that were selling goods and services backed by trade credit insurance. If you were evaluating suppliers and one was willing to sell to you on credit terms, and the other asks you to secure a letter of credit, which supplier would you choose?

Q: So, where will future growth come from in the North American market?

A: More U.S. companies are exporting abroad so the export market is a growth driver. All these company will need credit protection, and we provide in-depth information on the export market. Also, there's a need for trade credit protection on the domestic side. Just look at how many companies have gone bankrupt in the past two years. For a small company that lacks sophisticated credit management resources, the information we provide through our coverage review can be just as valuable as the protection we provide through the insurance

Q: What are your future growth plans?

A: We have no acquisitions in mind for the moment. Right now, we're focused on growing the sales force and product awareness in the marketplace. It's important to remember that the market penetration of credit insurance is not high, and the real interest isn't to take clients from Euler Hermes ACI or Atradius. We're more interested in reaching out to companies that do not use credit insurance and showing them how they can benefit from our products.

Q: How many people does Coface North America employ now, and what are your growth targets in terms of headcount?

A: We have about 450 people here in North America. Before the recession, we had been growing both on the sales side and in the number of employees. We expect to get back to growth mode in 2010 on the sales side, and once we are back to our historical growth targets of 10 percent to 15 percent a year, this will have a positive impact on the number of employees that we have.

May 1, 2010

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