Trade financiers face operational disruptions and potential losses as a result of the covid-19 pandemic
fewer people wear socks,” says Paul Rotstein of Gold Medal International, a wholesaler in New York. People may not sport socks in the summer but his firm starts shipping them to retailers in July, ahead of the start of the school year. There is, however, a big lag before he is paid. He normally uses trade-credit insurance to protect against the risk that his invoices go unpaid, but this year the insurers have slashed the amounts they are willing to cover by 50-90%.
Trade financiers face three problems created by the covid-19 pandemic . It has disrupted normal operations by slowing the travel of documents; it has raised the risk that existing loans will sour; and it has made lenders more cautious about making new loans. Financiers have been forced to be nimble. Staff turned up to the Bank of China’s Wuhan office wearing full protective gear. Banks started accepting scanned signatures and documents. A cargo-firm executive says it issued four times as many electronic bills of lading—receipts detailing goods on-board a ship—in March as it did in February. That has helped limit delays, though some in the industry worry that rises in fraud could follow.
The third problem is a possible crunch in new financing. To assess clients, banks and insurers rely on credit ratings. These have plummeted as firms’ cash flows have dwindled. The resulting squeeze may linger, says Ebru Pakcan of Citigroup, a bank; firms are downgraded quickly, but upgraded slowly. Some lenders may focus on large clients or exit some markets entirely. Insurers have cut their exposure to the industry by 8-9%, about half as much as in 2008-09.
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