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Marine Charter Default Insurance

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Marine Charter Default Insurance Marine Practice CHARTER DEFAULT INSURANCE In response to shipowners’ increasing concerns about charterers’ solvency, Marsh has developed an industry-first product that protects owners from damaging financial losses. Backed by both insurers and a leading financial institution, Marsh’s Charter Default product provides a mix of fixed recovery guarantee and credit insurance, tailored to the shipowner’s particular requirements. Covering both outstanding debt at the time of an insolvency and the loss of future revenue for a set period, the product de-risks important revenue streams, thereby assisting owners to attract better terms fr om lenders by reducing counterparty credit risk. i • Charter Default Insurance PRODUCT OVERVIEW PROTECTING REVENUE AGAINST THE RISK OF FINANCIAL DEFAULT f Financial default is a recurring problem. Recent high profile cases of shipping companies filing for bankruptcy have again highlighted counterparty risk in the shipping sector f Companies with ships on charter are exposed to loss of revenue if their charterer folds or, at best, to enforced renegotiation of charter hire terms f The risk of default increases at times of global financial uncertainty f Fixed Recovery Guarantees and Credit Insurance protect against the risk of charterer default f For a listed company, de-risking the revenue stream can improve stock prospects f De-risking the revenue stream can also attract better terms from lenders Marsh • 1 CREDIT INSURANCE FIXED RECOVERY GUARANTEE Key FeaTuRes • an insurance policy designed to compensate an owner • a financial instrument designed to transfer counterparty for financial loss as a result of a charterer’s failure to pay risk to a third party financial institution in return for undisputed amounts, typically because of bankruptcy payment of premium • The insured will be expected to make every effort to • The financial institution will pay a pre-agreed sum in the mitigate any loss (eg; by withdrawing the ship from a event the counterparty (the reference obligor) defaulting charter) experiences a credvent • The insured will be required to share the risk by retaining • The credit event will be defined in the terms but can a pre-agreed percentage of all potential losses (typically include bankruptcy, insolvency, Chapter 11 or its 20% - 25%) equivalent • all credit insurance policies covering charter default • The guarantee level is not linked to the actual financial would be expected to cover unpaid daily hire as a result loss and can amortise over the contract to reflect of charterer insolvency (less the self insured retention) reducing risk exposure up to a pre-agreed limit or until the ship is withdrawn from the defaulting charter, whichever occurs first. • a fixed recovery guarantee is a long term commitment between client and guarantor • an enhanced charter default credit insurance policy will also provide cover up to a pre-agreed limit for the • a fixed recovery guarantee can be transferred to an difference between the daily hire earned under the alternative party (e.g. a new owner), but any transfer defaulting charter and the daily hire earned from a must be sanctioned by the provider replacement charter (the Mark to Market Difference) • a fixed recovery guarentee will normally only be • In addition to compensating for unpaid hire, an available to cover a counterparty that has publically enhanced charter default credit insurance policy will traded debt (e.g. a bond issue) or which is a public cover unpaid expenses incurred by the insured on the company with actively traded shares. charterer’s behalf (Charterer’s additional Costs) • The MC2 wording also allows for compensation of losses following a commercial settlement between Insured and Charterer, provided the terms of the settlement have been agreed by the Insurers. • 12, 18 or, in certain circumstances, 24 month policy periods are offered. Ideally policies will include the provision to cancel and rewrite well before expiry (eg; 6 months before expiry). although credit insurers can decline to offer renewal terms, the ability to cancel and rewrite minimises the possibility of an insured being left without cover just as the credit risk turns bad. • The policy is non-assignable other than in respect of claims proceeds, albeit with strict provisos 2 • Charter Default CREDIT INSURANCE FIXED RECOVERY GUARANTEE Key diffeRenCes Provided by an insurance company Provided by a bank normally short term, typically not exceeding 24 months. short cover long term - matching length of reference not linked to duration of reference contract, but capable contract (e.g. 10 years) of rolling forward Premium renegotiated for each period. The policy will Premium fixed at inception for full contract period. typically be renewed six months before expiry to allow Premium payment schedule could be structured over rolling forward full contract period Will compensate an insured’s financial loss if a credit Will pay an agreed sum if a credit event occurs. actual event occurs to an agreed maximum limit, subject to the losses are not relevant. policy conditions Credit insurers insist on the insured retaining a There is no requirement for the buyer to retain a proportion of each risk – typically 20%-25% proportion of risk The maximum compensation is linked to contracted Can amortize over time to reflect declining contract revenue over the compensation period (e.g.; daily charter value hire x 18 months, less the self insured retention) COMMON FEATURES OF THE FIXED RECOVERY GUARANTEE AND CREDIT INSURANCE • The providers of both these products assess the probability of loss and calculate premium on an assessment of the reference obligor’s credit position. • There is finite capacity available for both products and, in general terms, there is a direct correlation between obligor credit rating, available capacity and premium. • There is a relatively small market available for both products. The global economic crisis had a negative impact on provider appetite and interest for shipping sector business is only slowly returning. • neither product is intended to bolster a failing charter. They are designed to provide a ‘sleep easy’ for healthy contracts. Marsh • 3 CREDIT INSURANCE FIXED RECOVERY GUARANTEE Indicative example (based on the MC2 wording) • Ten year time charter at us$27,500 per day yeaR PResenT value PayouT uPon annual CosT oF Contract credit evenT • Policy period: 18 months, renewable after 12 months 50% 1 100,000,000 50,000,000 1,612,500 • self insured retention: 25% 2 90,000,000 45,000,000 1,451,250 • Maximum compensation period: 18 months (540 days) made 3 80,000,000 40,000,000 1,290,000 up of; 4 70,000,000 35,000,000 1,128,750 • First loss period covering unpaid invoiced hire of up to 90 days 5 60,000,000 30,000,000 967,500 from the Date of loss (being the first date on which an insured 6 50,000,000 25,000,000 806,250 sum is due and unpaid by the charterer) and 7 40,000,000 20,000,000 645,000 8 30,000,000 15,000,000 483,750 • second loss period covering the Mark to Market Difference that 9 20,000,000 10,000,000 322,500 begins at the end of the first loss period and ends 540 days after the Date of loss 10 10,000,000 5,000,000 161,250 8,868,750 • limit for first loss period: us$1,822,500 (calculated at us$27,500 per day less 25% self insured retention multiplied Where revenue from a ten year contract is US$10m per year and the buyer by 90 days) of a fixed recovery guarantee requires coverage for 50%, of the outstanding contract value • Minimum limit for second loss period: us$5,906,250 (calculated at us$27,500 per day less a ‘floor’ of us$10,000 per day less 25% self insured retention multiplied by 450 days) • The floor represents the lower level of daily hire that could be anticipated to be earned if it was necessary to recharter the ship during the policy period. The floor will be agreed between insured and insurer when the initial terms are agreed • overall policy limit: us$8,437,500 (calculated as the limit for the first loss period plus the limit for the second loss period) • sub-limit for unpaid expenses incurred by the insured on charterer’s behalf (Charterer’s additional Costs): to be agreed, based on previously invoiced or anticipated amounts • Indicative premium for an overall policy limit of us$8,437,500 for 18 month policy period: us$180,000 • The above is for indicative purposes only. The premium actually quoted will depend upon an analysis of the charterer’s credit risk. CRedit InsuRanCe InFormation FIxeD ReCoveRy GuaRanTee RequireD InFormation RequireD • Identity of the charterer. • Identity of the counterparty. • Financial data relating to the charterer. This • Contract duration, contract value and may be problematic if it is a private company. amortisation schedule. • Details of the charter party conditions and details of the ships involved. • Trading history and payment experience with the charterer and its group companies. 4 • Charter Default AppENDIX FREQUENTLY ASKED QUESTIONS These Faqs should be read in conjunction with the insurance product developed by Marsh and Chaucer - Wording (‘MC2’), to which it refers. CHARTER DEFAULT FIXED RECOVERY GUARANTEE q1. Who offers this instrument? q3. What is Marsh’s role in this q4. Will Marsh be remunerated for transaction? the introduction?? a: It is a banking product. a: Marsh is not an expert in banking a: It is likely that Marsh will receive products. Where an insurance an introductory commission or solution appears less suitable we can service fee from the bank. Is it transferable or tradeable? q2. introduce our client to a bank or banks, but are unable to provide a: It can be transferred or traded, advice.
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