Structured trade credit insurance

A European bank lends 100 million euros over five years to the state power utility of a West African country to finance substations. It insures 90% of the loan in the private market, under a five-year policy that the insurer can neither cancel nor reduce as long as the bank meets its obligations. This is structured trade credit, the structured credit of the London and Bermuda markets, which together with pure political risk makes up most of the CPRI market. It is the opposite of a whole turnover policy in almost every respect. A whole turnover policy covers a portfolio of customers on ninety-day receivables, and the insurer can withdraw a limit overnight. Structured credit isolates one obligor and one transaction, runs for several years, and the limit is committed for the whole term. It usually covers non-payment whatever the cause, commercial or political, what the wordings call comprehensive non-payment. The obligor is often a ministry, a state-owned company, a national oil company, or a commodity producer that a trader has prefinanced. Two clauses carry the value of the policy. First, the insurer pays installments as the schedule falls due, with no acceleration, even if the bank has called the loan; it may elect to pay earlier but is not obliged to. Second, the waiting period after each missed installment, which policies commonly set between 90 and 180 days, sometimes longer. For a bank, such a policy can count as credit risk mitigation in its capital calculation, provided the insurer is well rated and the wording carries no condition that would allow a refusal.