Energy Trade Credit Insurance
“Credit Clearing” is the focus of alternative assurance. Easily understood as transferring the credit risk to an outside balance sheet – it is the fundamental concept behind every major commodity exchange globally. By using this concept to engage some of the strongest, most highly rated balance sheets in with world (insurance carriers) and individualizing the application through proven concepts like trade credit insurance and surety, the energy markets now have the tools to manage counterparty risk in a more efficient and cost-effective manner.
Energy Trade Credit Insurance (ETCI)
Tapping into the resources that support trillions in annual obligations, Navitas crafts credit optimization programs specific to your business. Energy trade credit insurance “clears” credit obligations via insurance carriers who assume the obligation in the event of a default (similar to the exchanges).
In the event of a counterparty default, the terms of the policy clearly define terms of payout, and the insurance company accepts the obligation in recovery. Fitting for most commodity contracts and commodity services, ETCI is fully in line with industry standard documentation (such as PPA, EEI, Transport, ISDA, NAESB). You may structure coverage in sync with your current credit policies and internal credit limits via flexible deductibles and co-insurance. You can be confident in a straightforward claim procedure, as well as prompt payout time frames with flexible coverage application across your counterparties. Typically, the cost is comfortably engrained in the trade values and blind to the counterparty. As an off-balance-sheet instrument, usage advances internal liquidity, improves the credit rating of your receivable base and promotes better margins.
Simple Natural Gas Example
- $10,000,000 credit existing limit
- $20,000,000 exposure need
- Insured notional value $10,000,000
- Cost @ 1% = $100,000 (annualized)
- Additional margin capture 1% per month = $1,200,000 annually
- Additional realized annual gain 11% or $1,100,000 annually
- Targeted cost 1/3 cent per mmbtu
Energy Assurance Surety
Specifically created for energy applications, Navitas commercial surety and guarantees offer an off-balance-sheet (unsecured), credit enhanced, liquid, premium credit, proven alternative to cash posting and Letters of Credit. The impact for you and your counterparty is immediate. While designed for collateral and assurance obligations, bonds can and have been used in support of many types of commodity transactions. Assurance bonds are a specific construct that should not be biased by assumption.
There are three parties to the transaction: the principal, the obligee/beneficiary, and the surety (the guarantor). If the principal doesn’t perform, the surety steps in, pays the obligee/beneficiary, and exercises rights on the principal. All parties come to an agreement via the bond itself; no different than a letter of credit. The claim terms are clearly spelled out for the obligee/beneficiary and nearly identical to a letter of credit. They are designed to payout promptly, conform with industry standard documentation and most credit requirement policies. Bonds have been utilized at almost every level of the industry. Two balance sheets are better than one. Bonds are proven and, in many cases, are now a preferred methodology.
Primary Features and applications for Navitas Assurance – Energy TCI and Energy Assurance Surety
- Letter of credit replacement at near to less cost than letters of credit
- Increased liquidity
- Energy Trade Credit Insurance – commodity trade, supply, and (physical) liquidated damages applications
- Cargo Trade Credit – serving the growing maritime distribution market
- Energy Surety Bonding and Guarantees – Transport, ISO, LDC, applications commodity supply
- Letter of Credit Fronting – Legacy administration compliance, Contract Compliance (where surety is not accepted)
- PPA Support – Qualifying and clearing
- Transport – Pipeline & power transportation contracts
- Processing Agreements – upstream/downstream supply and distribution
- AMA – Asset management agreement assurance
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