We do not want to drive a company into insolvency

As one of the world's leading credit insurers, how does Coface assess the impact of the Corona pandemic? Should we be prepared for a major wave of bankruptcies? Was now the right time for the supply chain bailout to expire? What is in store for companies now?

We asked Jochen Böhm, Risk Underwriting Director and Member of the Management Board for the Northern Europe region at Coface. He is responsible for risk and commercial underwriting at the international credit insurer and specialist in receivables management. He knows exactly what companies need to pay attention to in order to operate successfully in the long term, to what extent risks can be taken and how the risk situation is developing for companies worldwide.

In an interview with our Managing Partner Uwe Köstens, Jochen Böhm tells us which tools and measures entrepreneurs should rely on now to prepare themselves even better for the future.

Mr. Böhm, in an interview at the beginning of the year you said you did not expect a wave of insolvencies in 2021. Has that changed in the meantime?

We are now almost six months further into the year and the fact is that Coface is not expecting a wave of insolvencies. Not even with waves of insolvencies. What we do expect - and we can already see this clearly in the first signs - is a shakeout in the markets, but the intensity of this will vary greatly.

What is your overall assessment of the federal government's Corona economic assistance? Has the government done enough to help businesses?

That's a slippery slope question. Has the government done enough, and especially before the federal election? I think all of us in the business community are very grateful that the federal government has resorted to these measures. This level of government assistance is historic. It includes many different measures, such as the protective shield for companies with trade credit insurance, to which we in the credit insurance industry have made a significant contribution.

Of course, we must not forget those who have been particularly affected by the pandemic. From their perspective, it hasn't been enough at the back and front. But in terms of the general economic situation, the measures taken by the German government have made a major contribution to ensuring that we in Germany have come through this crisis in a fairly stable manner so far.

The protective umbrella set up jointly with the federal government and trade credit insurers expired as planned on June 30, 2021. Why was now the right time for this?

At Coface, we had even considered ending the protective shield at an earlier stage. Towards the end of last year and the beginning of this year, we recognized signs of a certain normalization in the economic landscape. The problem at the beginning of the protection umbrella was that we really didn't know where the journey was going.

The pandemic, which is historic and which, above all, is also a global pandemic and therefore a global crisis, has presented us with extreme challenges. The tools we all look to so confidently and have used for many years to manage our risks suddenly threatened to fail. This was because economies around the world came under unprecedented strain. Against this backdrop, the protective umbrella was stretched. But now that the fog is lifting and we can see the future much more clearly again, now that our instruments are taking effect again, our algorithms, our forecasts, our economists - now we believe it is time to roll back this protective measure as well.

What has the umbrella brought from your perspective?

At the beginning of this pandemic, the credit insurance industry sat down virtually at the table with very strong support from the German Insurance Association (GDV) and in cooperation with the German Federal Ministry for Economic Affairs and Energy (BMWi) and the German Federal Ministry of Finance (BMF). The big goal was to stabilize supply chains. In other words, to bring calm to the turmoil and to radiate confidence that we as credit insurers are doing our part to jointly stand strong through this crisis. This is what the umbrella ultimately achieved.

It was a powerful psychological tool, as the major credit insurers showed: we stand by our responsibility and we maintain the limits, which are particularly crucial for companies that - and this is very important in the spirit of the protective umbrella - got into the crisis through no fault of their own. In other words, companies that were "healthy" before the pandemic and now faced major ad hoc challenges. We had to protect them and we had to support them. As a result of this protective shield, which ran for more than a year, the situation calmed down.

How has Coface as a credit insurer prepared for the expiry of the protective shield and what is important for entrepreneurs now?

That is an important question, because of course there is still some uncertainty now. What happens when the protective shield expires? Is that some kind of cliff, with masses of limits being reduced or excluded all at once? That is not the case. Coface has not limited credit limits on a grand scale to this date, but has permanent monitoring, constant monitoring of risks. In this way, we have succeeded in regaining more and more of the necessary transparency from month to month in order to take appropriate credit decisions and measures.

What people tend to forget is that the protective shield gave us the task of continuing to manage risk. It was also in the interests of the federal government and the taxpayers that we should not support "sick" companies, but rather those that have fallen into crisis through no fault of their own. Against this background, there is a smooth transition without any special measures. Of course, we are still very close to the risk and very close to our customers in order to look closely and see how everything develops. The crisis is not over with the expiry of the protective shield, nor do we expect a wave of insolvencies. But we do anticipate a shakeout, which we will of course be facing over the next few months, quarters, perhaps even years.

What are your expectations until the end of the year? Does the Corona pandemic increase the need for restructuring?

Yes, we are already seeing this. At Coface, there is a special department called "Special Risk Management”. This is where our experts are based, and they look after around 150 cases very closely. We are already noticing a slight increase in the number of cases. However, it is not so much the number of cases that concerns us, but their complexity. The cases are getting bigger, the cases are getting more difficult - we have overlapping situations. These are usually companies that were already weak or undergoing restructuring before the pandemic and have now, in some cases, found themselves in a more difficult situation as a result of the pandemic. We have to take a close look to avoid insolvency.

But we also have companies that are having very big problems because of the pandemic. Due to the sharp rise in prices, especially for commodities, but also the shortage of intermediate products such as semiconductors, microchips or even lumber - all these are materials that are very, very scarce at the moment. This poses a particular threat to companies that are already relatively weak on the chest.

What is the concept for risk monitoring and management at Coface? What is crucial in early risk identification?

The most important thing is to be very close to the risk in order to identify changes early on. Added to this is the speed at which companies today maneuver themselves into precarious situations. We have to intervene early enough - but with caution. As credit insurers, we have a great responsibility here. We don't want to drive a company into insolvency, but rather analyze precisely where the risks are for our customers, assess and manage them, and then prevent the worst from happening.

For us in early risk detection, cooperation with our customers is therefore crucial. There are very few early warning signals. One important indication is the payment experience of our customers. Every customer has to report to us an overrun of payment targets from a certain point in time. That's many thousands of reports fed into our system every day. It's basically like a clinical thermometer. From this, we can read not only how payment morale is in Germany. Since we are a very strong exporting country, we also map foreign customers.

At the beginning of last year, we believed that at some point this curve would go steeply upwards. In other words, that buyers would run out of cash, that payment terms would be stretched and that there would be more delays. But so far we are only seeing a slight upward trend. It is getting tighter, but without a steep upward curve. For us, that means we have to look at other criteria. That's where Coface really benefits from the fact that we are organized by industry. My team includes industry experts for the largest industries, who monitor them closely and look at the markets. What is changing there? What is the competitive situation? What are the general conditions? This enables us to identify at an early stage the direction in which we need to steer.

This ties in directly with the next question: Can external parties such as Coface or even restructuring experts better identify early warning indicators based on their experience and perspective at an early stage of the crisis? I suspect the answer...

Yes, we can, because we have an all-round view. In addition to our expertise for all industries, we also have our economists who support us with their research. And for the credit check, the here and now is indeed particularly decisive - and that in very close exchange with our policyholders. They are almost the most important source we have. In constant contact, we exchange information about what our customers feel in the market, what they experience, what they feel. Of course, this also helps us make credit decisions. We can make more generous decisions when we know: This is a customer who has good accounts receivable management, who knows the industry well, or who doesn't want to take any big risks themselves.

What factors or metrics should companies look for when developing and implementing an early warning system?

We would all love to have an early warning system. Preferably with artificial intelligence. But that will take a while yet. The most important early warning system is therefore monitoring the customer. That starts with our customers, who know their customers and simply run a tight, good, intelligent, professional accounts receivable management. That means they look closely at what payment terms they give their customers and what the actual payment behavior is. The next step is to follow up on those incoming payments, which is the dunning process, which is something that most companies have been doing for many decades. That is very important. In addition, there are changes in the environment: Every customer is advised to observe his competitors and the markets.

Some prices are going through the roof at the moment. Not only for raw materials, but also freight costs have exploded. We all noticed the accident in the Suez Canal. Or when the press reports that there are delays at suppliers - entrepreneurs have to keep an eye on all of this in order to assess and foresee what I might have to face in case of doubt.

What lessons should companies learn from the Corona crisis and what is particularly important now? What were the lessons learned at Coface?

I talk to many customers myself and they often remark critically that in the past they relied too much on "just in time". Everything was meticulously structured and planned. This means that the goods arrived in the warehouse only on the day on which they were due to be processed and left the warehouse. All the delays and hold-ups naturally created huge hurdles. I think an important learning for all of us is to reintroduce a certain amount of warehousing, to have a certain buffer so that we can continue to produce independently for a certain time. In addition, we have to take a close look at our business partners: Are these companies strong? What is the situation with my supplier? Is my supplier able to continue supplying me in terms of creditworthiness? It is important to have a clear view of the supply chain as well as the sales side. Build up a buffer and plan ahead.

Know your Customer and know your Supplier.

Absolutely. You're always part of a triangle. What good is it just to have great customers. Of course, I also have to have the supplies, the preliminary products, to ensure production.

Global becomes glocal ...

Exactly. We couldn't overdo it and make things worse, but had to steer through with a cool head. With our customers and for our customers. The protective shield also made a good contribution to this.

Currently, we're all excited about the significant easing of Corona-related restrictions. What are you looking forward to as we head into summer?

At some point, even if it's still so exciting, I'm happy to switch off and just let my mind wander.

Mr. Böhm, thank you very much for the interview!

Do you have any questions about credit insurance or early risk detection as a crisis prevention tool? Then feel free to write directly to our experts!