Unlocking liquidity through the use of Surety Bonds & Guarantees

March 29, 2022 by Kai Stoetzel, Head of Surety DACH (the interview originally appeared in German on Aon bloggt)

A culmination of raw material shortages, substantial price increases and more than two years of financial pressure caused by the pandemic has taken a heavy toll on the financial strength of companies across multiple sectors. Within Aon, our focus during this time has therefore been on unlocking additional operational liquidity. The transfer of guarantees from the banking to the insurance market creates a simple but little-noted route here. "We want to change that," says Kai Stoetzel, Head of Surety DACH at Aon Germany, "and present these possibilities to companies." After all, the benefits are many, even on a global scale.

The German economy is suffering from the ongoing shortage of raw materials. How much of a burden does that place on companies' financial strength??

Kai Stoetzel: Many companies in the manufacturing industry have full order books. However, the orders cannot be fulfilled because due to a shortage of certain raw materials or components. A typical example of this is the ongoing shortage of chips (electrical parts), which is not only slowing production within the automotive industry, but the resulting sales losses are placing a considerable burden on the financial strength and liquidity of the companies affected. The situation is not expected to improve any time soon, not least in view of raw material and energy prices.

What are the effects of the price increases?

Kai Stoetzel: An energy trader client recently shared a price chart with me that highlighted how energy prices have risen by over 400 percent in the past twelve months. This applies not only to individual markets, but across the board in the commodities and energy sector. The question for companies is to what extent they can pass on these price increases to their customers. Often, this is only partly the case, while at the same time there is growing uncertainty about how prices will develop in the future. We are in the third year of the pandemic, so often all possibilities to raise cash have been exhausted, from inventory to receivables management. As a result, many companies urgently need financial resources.?

What does that mean?

Kai Stoetzel: Companies ultimately want financial flexibility. Existing current account lines at banks should not be blocked by guarantees, but should remain reserved for working capital. After all, securing liquidity to maintain business operations is a priority. When looking for alternatives, many companies do not think of the insurance market. Yet the surety bond and guarantee market can offer simple, effective solutions that enable debt financing to be placed on several pillars without adding leverage on the company. In this way, risks can be spread sensibly, especially against the background of interest rates that are likely to rise in the future, and dependence on individual lenders can be reduced.

What do you recommend specifically, Mr. Stoetzel?

Kai Stoetzel: Companies can detach sureties from their banks' current account lines and simply place them in a deposit insurance. An example: A producer has a current account line at his bank in the amount of ten million euros, which he uses half for the ongoing financing of operating costs and half for guarantees. If the company now transfers the guarantee of five million euros to the insurance solution, its liquidity improves immediately, in this example by 50 percent, i.e. five million euros. The advantage of this is that the company incurs neither additional costs nor additional effort.

What about the guarantee requirements?

Kai Stoetzel: The requirements imposed by banks and insurers are comparable - and often even lower in the insurance market. However, insurance companies usually have better ratings, and in handling, the companies benefit from their international positioning that they often have. If local units exist in many countries, the guarantees can be reviewed directly in accordance with the locally applicable regulations and in the respective national language, and thus meet with greater acceptance. At the same time, Aon makes its international network and expertise available to its customers. This not only gives companies access to the most suitable, competitive insurer(s) in each case butalso ensures they have access to regional specialists who know the local market, and can be reached without time differences. This may also be an advantage if there is ever a need for coordination in operational business after the contract has been signed.