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Trade Receivables Securitisation – How to undertake a Survey or Audit

Understanding the key processes and adhering to best practice is essential for the smooth and successful completion of any trade receivables securitisation; and underwriting, risk assessment, and trade credit insurance are vital to the formation of any agreement. The undertaking of a survey or audit on an existing or potential credit insured client is fundamental, and it is of the utmost important that such tasks are carried out correctly. Abe Ezekiel, managing partner at M Taher & Co Solicitors, presents us with his essential guide for undertaking a survey or audit when seeking to put together a trade receivables securitisation, standards to which all inspectors should look to adhere:

 

1.   The policy document: does it provide the lender with the required security? (This task can often be best undertaken by a specialist credit insurance broker who has a sound working knowledge of factoring and invoice discounting).

 

2.   Is the policy already assigned or similar to another party? Multiple assignments should be avoided and only accepted in very exceptional circumstances. If the policy is already assigned, and that assignment is to be rescinded in favour of another, care must be taken to ensure that all parties fully understand what (if any) security the policy will provide them with.

 

3.   If the lender is funding more than one party, the policy should be checked to ensure that all of the lender’s clients, who are to be funded under the funding agreement, are endorsed to the policy as joint insureds.

 

4.   That all premiums have been paid and are completely up to date. Without accepting the direct and indirect obligations and liabilities of becoming a joint insured, ideally the lender should undertake to pay all premiums (and if appropriate all other charges).

 

5.   That all debited salvage, credit limit, and any other charges have been paid in full.

 

6.   To see if in the past the insurer whose policy is to be assigned (or similar) has paid any claims. If claims have been paid, the lender should check to see if any future salvage (recoveries) are likely to be paid by the insolvent estate. If salvage is likely, such payments should be irrevocably assigned and paid direct to the underwriters. Such monies are the property of the insurer, and in the event of them being paid direct to the insured, and that party failing before they are paid to their owner (the insurer), in certain circumstances the lender could have a contingent liability.

 

7.   That at all times the debtor name on the invoice(s) reflect precisely the full and correct name of the debtor, the mutually agreed terms of payment, and that the credit insurance credit limit is adequate to cover current and projected indebtedness.

 

8.   That the terms of payment the client is extending or is likely to grant to his debtor are clearly endorsed to the policy.

 

9.   That the policy covers all of the countries the client supplies to.

 

10.  That all declarations of turnover have been made correctly. (In the event of a maximum credit limit the whole of the insured’s turnover with the debtor must be declared).

 

11.  That key directors and the credit controller understand and are complying with the terms of their credit insurance policy.

 

12.  The policy is clearly endorsed with overdue reporting periods which mirror precisely the client’s procedures. Credit insurance policies rarely allow a reporting period for documentary terms. (if a Bill of Exchange is dishonoured it must immediately be reported to the underwriter).

 

13.  That the policy covers the currencies the insured sell in.

 

Written by Abe Ezekiel for BCR Trade  Receivables Securitisation Summit in London

 

Attendees to the BCR Trade Receivables Securitisation Summit in London on 12 May can expect to learn more about the absolute essential practices in putting together a successful receivables financing arrangement.



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