Volume 5

Partners' Perspective

Political Risk Insurance: A Unique Tool for Managing Lines of Credit

ABC Manufacturing, Inc. was in a quandary. Yearly sales of its widgets were at an all time high. ABC was keen to increase production and further the research and development of a new product. In order to finance this growth, ABC wanted to tap into a key asset - $50.0 million of inventory and equipment - to use as collateral for a further line of credit from their lender.

ABC's bankers balked at the request.

Why? The inventory and equipment was located outside of the United States.

Many U.S. banks simply exclude all foreign assets from the lending base. It doesn't matter whether your inventory and assets are in the U.K. or the Ukraine, France or French Guyana. In most cases, banks will not lend against them.

Enter: Political Risk Insurance for asset based lending

Equity Risk Partners can place Political Risk coverage on your Foreign Country Assets and nominate the lending bank as Loss Payee under the policy.

It's a Win - Win.

You get your line of credit. The lending bank gets collateral against the loan and guaranteed payment in the occurrence of a claim.

Coverage Structure: Political Risk Cover for Asset Based Lending - Written on a "Contractors Comprehensive Plant & Equipment" (CCPE) wording.

Coverage offered: Confiscation, Expropriation, Nationalization (CEN) - protects against partial or total loss of an investment/asset as a result of actions taken by a host government that reduces or eliminates the investors rights, ownership, or control of the foreign investment. For example - A host government seizes an asset and does not adequately compensate the owner.

Deprivation - A host government action prevents the re-export of physical goods, inventory, production equipment, or other assets. Although these items may not have been seized, the inability to repatriate them makes them worthless.

Forced Abandonment - An insured is compelled to leave its assets/equipment behind in circumstances that are prejudicial to the safety of its staff.

Political Violence and Terrorism - War, civil war, civil disturbance, sabotage and terrorism - (SRCC purchased separately on property policy.)

Indemnity: 100%

Policy Period: 3 years (minimum) - 10 years (maximum). Rates vary for prolonged terms.

Rates: 0.4% - 0.8% per annum on limit purchased.

Deductible: The waiting period for Political Violence and Deprivation (period of time from date of loss to filing a claim with the underwriter) is 180 days.

The rates will vary depending on perceived risk at the time. As an example, CCPE coverage in Mexico is currently running at around 0.5% on limits purchased per annum. (Rates will rise (as will the perceived Risk Indicator) as we approach next year's Mexican election). In other words, to cover $10.0 million of inventory and equipment will cost $50,000 per annum. This is not just about insurance cover - it's about accessing the loan.

The Wording will contain a Loss Payee clause which would make the Lending Institution the recipient of any claim payout.

ABC acquired a Political Risk Policy for 2 reasons:

  • To access the credit line from the bank, which released much needed money for growth
  • To protect their balance sheet by covering their overseas assets against unforeseen and potentially catastrophic government action

For further information, please contact your Equity Risk Partners professional.