A Trade Secret Comes to Light, Again

Globalization and customer consolidation are spurring renewed interest in trade-credit insurance.

Three years ago, Skyworks Solutions Inc. was in a quandary. Sales of its semiconductors were soaring and the company was eager to increase capacity and boost research and development. To finance the expansion, Skyworks wanted to tap a key asset — $60 million in receivables — to use as collateral for a line of credit, but its bankers balked. For one thing, the chipmaker was operating in the red, with a heavy burden of debt from a merger. For another, 70 percent of its receivables were from customers in China and Korea. Spooked by the unfamiliar political and economic risks in Asia, Skyworks’s American bankers were reluctant to extend credit.

Skyworks found a solution in a long forgotten and little-understood finance tool: trade-credit insurance. The Woburn, Massachusetts, company bought a policy to insure its receivables, which effectively guaranteed its money if a customer failed to pay its bill or significantly delayed payment. A few months later, Wachovia Bank approved a new $50 million line of credit. Today, thanks in part to its timely financing deal, Skyworks is a significant player in specialty chips for cell phones and other handheld devices whose customers include wireless giants Nokia, Motorola, Samsung, and Siemens. Revenues have nearly doubled in the last three years, to $785 million in 2004. And Skyworks is profitable, earning $22.4 million last year. “The trade-credit insurance allowed us to unleash cash at a time when we needed to feed growth,” says Paul Vincent, vice president of finance.

Trade-credit insurance has been around since the Civil War, but it never really caught on in the United States. Now, as a result of globalization and other economic factors, CFOs are rediscovering this antique finance tool — and putting it to good use. Some use it simply to expand their available collateral base. Others want to insure receivables from far-flung customers in unstable or economically immature regions, or to reduce the risk of rapid expansion into new and untested sales territories. Still others buy it as a measure of protection in situations in which a single, large customer accounts for the bulk of their sales. Trade-credit insurance helps reduce the risk of financial catastrophe if a big customer declares bankruptcy. With more industries undergoing consolidation — think retail and telecom, to name just two — customer-concentration risk is a growing concern for many companies.

Bankers favor trade-credit insurance because it enables them to write more asset-backed loans. CFOs say trade-credit insurance is appealing in part because it buys them peace of mind at a relatively low cost. Skyworks’s premium was less than 1 percent of the total amount of the receivables it used for security. (They were placed in a special-purpose entity that was fully consolidated for accounting purposes.) Skyworks’s new policy enabled the company to negotiate a better interest rate than it would have gotten on an unsecured line of credit. Vincent says he has renewed the company’s policy every year for the past three years, and intends to maintain the policy for years to come.

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