Pricing Survey: Global results

Transcription

1 Pricing Survey: Glbal results August 2012

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3 PRICING OF GUARANTEES: GLOBAL RESULTS Frewrd AECM the Eurpean Assciatin f Mutual Guarantee Scieties has currently 38 Members perating in 20 EU-Member States, Turkey Mntenegr and Russia. Its members are mutual, private sectr guarantee schemes as well as public institutins, which are either guarantee funds r develpment banks with a guarantee divisin. They all share the missin f prviding lan guarantees fr SMEs wh have an ecnmically sund prject but cannt prvide sufficient bankable cllateral. AECM is primarily a trade assciatin whse cre activity is defending the interests f its members twards Eurpean and internatinal authrities. This is essential fr its members. Fr the Assciatin s lbbying activity t be effective and trustwrthy, it has t be based n reliable statistical data. Such data shuld serve as first-hand material t cnduct specific research. T this end, a Statistics Wrking Grup (WGS) has been created within AECM. One f its first study prjects was t assess Hw AECM members price their guarantees, which it is f particular imprtance. Indeed, it is key fr guarantee schemes that guarantee premiums are set apprpriately, taking int accunt different parameters and criteria allwing the scheme t functin sustainably, all the while being careful t keep prviding an incentive t facilitate SMEs access t lans. This study fllws a first general survey cnducted by AECM n its member rganizatins in 2003, which fr the first time presented an inventry f the different guarantee systems arund Eurpe. The aim f this dcument is t g int mre specific technical detail n a selected issue. All thse - and in particular the AECM secretariat - wh cntributed t the drafting f the study are gratefully acknwledged. Jsé Fernand Figueired Bernard Jehin Marcel Ry AECM Chairman AECM Wrking Grup Statistics and Studies President AECM Secretary General

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5 T this dcument is annexed the Pricing survey: AECM Members descriptin

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7 Intrductin Pricing is an imprtant tpic fr Guarantee Scieties, because it has t be in an apprpriate range: nt t high, therwise it might discurage the use f guarantees, and nt t lw, t avid fr instance the unnecessary use f guarantees fr lans which are sufficiently cllateralized and culd nrmally be granted by banks withut the presence f a guarantee (private r public). In this case, a very lw guarantee premium culd becme a cmmercial argument fr banks t sften their requests twards their clients. The design f the premium level is variable and depends either n the applicatin f the principle f mutualism r n the direct r indirect recurse t public funds. In any case, the pricing has t reflect the general ecnmic envirnment and specific circumstances under which respective natinal guarantee schemes have been set up and perate. When a guarantee scheme is integrated in an institutin prviding different supprt instruments, such as lans r grants, there can be synergy effects n the pricing. Indeed, transactin csts can be lwered if the risk analysis is dne in rder t ffer several prducts at the same time; a guarantee applicatin resulting frm an internal request within the institutin can als create privileged premium cnditins, resulting frm a better transparency. Methdlgy AECM has carried ut a survey amng its members n the pricing f their guarantee prducts. Different features have been assessed, namely the basis and the cmputatin f the guarantee premium, the different terms f payment and examples. In particular, we assessed the fllwing crucial aspects regarding pricing mdels f AECM members: 1. The calculatin basis f the guarantee premium 2. The effective calculatin f the guarantee premium 3. The charging methd f the guarantee premium 4. Additinal administrative r managing premiums charged n tp f the guarantee premium 5. The different pricing plicies This survey des nt aim at identifying best practices r set up benchmarks. Pricing is influenced by many factrs which cannt be taken fully int accunt, because f the limited scpe f this study. Pricing diversity prvides evidence that in similar situatins presenting sme cmmn features, alternative appraches can be used in setting up a pricing mdel. While drafting the survey, it became clear that the definitins used by the respndents cncerning the duratin f guarantee cmmitments was essential t assess the different pricing schemes. A cmplementary questinnaire was sent ut t the respndents fr this purpse. Findings AECM has received 30 answers fr 38 f its member rganisatins, as well as 15 pricing grids. 1 P a g e

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9 1. MATURITIES OF GUARANTEE COMMITMENTS As a first step, it was necessary t present the underlying definitins used by AECM members fr the different maturities, i.e. shrt, medium and lng term. The fllwing tw charts shw the variety f different definitins f maturities f guarantee cmmitments used by AECM members wh have taken part in the survey. The first graph illustrates the different maturities applied t shrt term cmmitments and is states the effective numbers f respndents. a) Maturities f shrt term cmmitments Guarantee duratin fr shrt term lans: (in effective numbers) n.a. 4 n distinctin 3 n ST <18mnths 2 2 <24mnths 6 <12mnths Number f respndents Amng the respndents accunting fr shrt term maturities, the majrity (13) cnsider shrt term cmmitment as 12 mnths. 8 respndents cnsider either 18 mnths r 24 mnths as the maximum shrt term duratin. 9 respndents either d nt distinguish shrt term maturities in their prtfli, d nt prvide guarantees fr shrt term r did nt answer. The graph n the next page specifies the medium term definitin used by the respndents. 3 P a g e

10 b) Maturities f medium term cmmitments Guarantee duratin fr medium term lans: (in effective numbers) n.a. n distinctin MT and LT 5 5 n distinctin 3 24mnths up t 7years 4 24mnths up t 5years 18mnths up t 5years mnths up t 7years 1 12mnths up t 5years 12mnths up t 3years Number f respndents There is n unifrm picture emerging frm the definitin f the medium term and the lng term duratins. It is striking that nearly half (13) f the respndents d nt distinguish the medium term frm the ther maturities (8), r d nt prvide an answer. Amng thse wh have a definitin fr the medium term, 53% (9) set 5 years as the upper limit, fllwed by 18% wh apply 3 years as an upper threshld. 4 P a g e

11 2. CALCULATION BASIS FOR THE GUARANTEE PREMIUM The calculatin basis is a determining feature in rder t establish the guarantee premium. Great differences in the premium level will result depending n the basis chsen. The chice f the calculatin basis will als vary accrding t the underlying maturity, distinguishing between shrt term lans n nside and medium t lng term lans n the ther. a) Fr guarantees n shrt term cmmitments - Overdrafts: Typically, verdrafts and wrking capital lans are issued as credit line. While this line cmes with a maximum amunt, the custmer will draw accrding t his peratinal needs, e.g. fr financing inventry, etc. and repay flexibly in a similar way. Therefre, the extent t which the line is effectively used can be very variable ver the length f the cmmitment. Similarly, the guaranteed amunt, as a percentage f the funds effectively drawn, will als be variable ver time. under the individual peratin. Cnsequently, this methd ffers the advantage f reducing management / administrative csts, as it allws aviding the precise fllw up f actual use f the shrt term facility. Als, basing the premium n the maximum risk expsure is legitimate frm a risk management pint f view, as a brrwer getting int difficulties will nrmally use the full amunt f its authrized verdraft befre bankruptcy. Amng the respndents, 77% grant guarantees fr shrt term credit in the frm f verdrafts, wrking capital lans, etc. We have fund that the great majrity f the respndents (64%) use the guarantee s nminal amunt (which represents a fixed percentage f the underlying credit). This chice, is related t the fact that fr verdrafts and credit lines, the use f the credit vlume can be variable, ver time, as mentined abve and therefre difficult t track. The nminal guarantee amunt in turn is knwn, it represents the maximum cmmitment and risk expsure fr the guarantee institutin While the use f the nminal amunt f the guarantee as a calculatin basis is the predminant mdel, it has t be signalled that sme alternative methds are practiced by sme members: 1 respndent uses the nminal amunt f the underlying credit 1 respndent applies the used amunt f the guarantee s cmmitment 2 respndents use the utstanding credit amunt accrding t a theretical repayment schedule. 5 P a g e

12 Calculatin basis fr premiums - shrt term verdrafts & wrking capital 7% 3% 23% 64% On nminal amunt f guarantee cmmitment On nminal amunt f the underlying credit On the used amunt f guarantee cmmitment 3% On utstanding credit amunt accrding t a theretical repayment schedule D nt grant guarantee n shrt term credit b) Fr guarantees n shrt term cmmitments Redeemable 1 lans: Redeemable shrt term lans present a different situatin as cmpared t verdrafts and wrking capital lans, as they are granted fr a determined lan amunt and either repaid in ne sum r repaid accrding t a repayment schedule. Significantly mre respndents grant guarantees fr shrt term redeemable lans (93%) than fr verdrafts (77%). Again, as fr verdrafts, the preferred chice f calculatin basis is the nminal amunt f the guarantee cmmitment (74% f answers). Anther 3 % base the calculatin f the premium n the utstanding amunt f the guarantee s cmmitment (this is applicable in case f a repayment f the lan by instalments). In cntrast t verdraft guarantees, in this case a few mre members use the credit amunt as a calculatin basis: 1 respndent uses the nminal amunt f the underlying credit 3 respndents use the utstanding credit amunt f the accrding t a theretical repayment schedule 1 respndent uses the utstanding credit amunt accrding t the effective repayment schedule 1 Redeemable: fr shrt term credit redeemable means investment lans n a shrt maturity fr which the principal is paid back accrding t a fixed schedule 6 P a g e

13 Calculatin basis fr premiums - shrt term redeemable lans On guarantee nminal amunt 3% 3% 10% 7% On nminal amunt f the underlying credit 3% 74% On the used amunt f guarantee cmmitment On utstanding credit amunt accrding t the effective repayment schedule On utstanding credit amunt accrding t a theretical repayment schedule D nt grant guarantee n shrt term credit c) Fr guarantees n medium t lng term investment lans: Medium t lng term lans are mainly granted fr investment prjects. The lan amunt is typically fully drawn and repaid accrding t an established repayment schedule. The guarantee amunt will decrease ver time in prprtin with the lan amunt, as the latter is prgressively repaid. Fr this type f lan guarantee, there are different ptins fr a calculatin basis: The guarantee premium can be established n the basis f the guarantee amunt (established as a percentage f the utstanding amunt f the underlying credit) accrding t the effective repayment schedule. This ptin is the mst cmmnly chsen prcedure (44 % f the respndents). Anther variant f this methd is the use f the guarantee amunt (established as a percentage f the utstanding amunt f the underlying credit) accrding t a theretical repayment schedule (23 % f the respndents). This latter ptin allws aviding management csts related t a detailed fllw up. It has t be kept in mind that the difference in the amunt f liability between effective and theretical schedule is ften very small. Hwever, 33 % f the respndents use the guarantee nminal amunt, as is the case fr shrt term lans. 7 P a g e

14 Calculatin basis fr premiums - medium t lng term lans 33% 44% On utstanding credit amunt accrding t the effective repayment schedule 23% On utstanding credit amunt accrding t theretical repayment schedule On guarantee nminal amunt d) Fr cunter-guarantees issued by Guarantee Scieties t secure bank guarantees r bnds: In sme cases, aside frm bank lan guarantees, guarantee institutins can als issue ther types f guarantees, e.g. cunter-guarantees fr a guarantee by a bank, perfrmance bnds, etc. Fr this type f peratins, the vast majrity f the respndents (60%) use the guarantee s nminal amunt One respndent uses the nminal amunt f the underlying credit. The remaining 37 % f the respndents d nt issue such guarantees r did nt answer. Calculatin basis fr premiums - cunter-guarantees f bank guarantees, etc. 3% 10% On guarantee nminal amunt 27% 60% D nt grant guarantee n "bank guarantees" N answer On nminal amunt f the underlying credit 8 P a g e

15 3. CALCULATION OF THE GUARANTEE PREMIUM Aside frm the calculatin basis, it matters t knw hw the guarantee premium is calculated, i.e. whether it is a fixed premium r whether it is variable accrding t certain criteria. The feed-back frm the survey shws that fr 11 ut f 30 respndents, the guarantee premium is fixed: 9 have abslutely fixed premium, irrespective f the guarantee cverage rate, and fr 2 respndents the premium is based n a fixed rate, but varying in accrdance t the guarantee cverage rate f the lan (cverage rate ranges). Guarantee premium calculatin 37% 63% Prprtin f fixed premiums Prprtin f variable premiums Fr 19 ut f 30 respndents r 63%, the premium is variable, depending mstly n the Internal Rating System (11 respnses), the quality f guarantees (7 respnses), the duratin f the guarantee cmmitment (8 respnses) and the type f lan (10 respnses). Many f them use mre than ne criterin at a time t determine the rate. 9 P a g e

16 Factrs determining variable guarantee premium cmputatin external rating system ERS 1 internal rating system IRS 11 quality f cllateral 7 depending n the decider lan's duratin 2 2 duratin f guarantee cmmitment 8 amunt f guarantee cmmitment type f prject 7 7 type f lan P a g e

17 4. GUARANTEE PREMIUM COVERAGE AND PAYMENT a) What des the guarantee premium cver? The guarantee premium has t cver a number f expenses t ensure the sustainability f the guarantee institutin. The respndents have listed the fllwing items: Fr 1 ut f 28 respndents the premium partially cvers the risk premium Fr 2 ut f 30 participants in the survey did nt answer this questin Fr 15 ut f 28 respndents (54 %): the guarantee premium cvers management/administrative csts and the risk premium. Fr 5 ut f 28 respndents the premium nly cvers management/administrative csts, Fr 6 ut f 28 respndents the premium nly cvers the risk premium, Fr 1 ut f 28 respndents the premium partially cvers management/administrative csts and risk premium, This shws that less than a half f the respndents cver certain cst items thrugh ther surces than the guarantee premium, e.g. thrugh public supprt. Asked if any additinal fees (administrative r riginatin fees) except the premium are charged, 50% f the respndents answered that n ther administrative fees are claimed except the premium. Mrever, 73% f the respndents answered that they d nt charge ther riginatin csts. b) Wh pays the guarantee premium? Guarantee schemes usually wrk tgether with their partner banks, which ften prvide the main distributin channel fr them. This makes sense, since banks usually have direct and regular cntact with the SME beneficiary. It is therefre nt surprising that fr 63% f the respndents, banks pay the guarantee premium t the Guarantr and subsequently charge it, partially r ttally, t the SME. Hwever, it is als interesting t nte that fr a substantial 37% f the respndents, the SME pays the guarantr directly, nt transiting via the bank. 11 P a g e

18 Wh pays the guarantee premium? 37% SME t Guarantr 63% Banks t Guarantr: Bank charges it, subsequently, partially r ttally t SME c) Subsidisatin The guarantee premium level is nt nly essential fr the sustainability f the guarantee institutin, it als has t be as affrdable as pssible fr the SME beneficiary. Since it represents an additinal cst n tp f the interest rate (althugh in many cases it may at least be cmpensated in part by a reductin in the bank s interest rate), applying a t high premium wuld make the guarantee unaffrdable. It is the reasn why partial r full public subsidies are granted t help SMEs t pay the guarantee premium. The survey shws that 40 % f the cases examined, the SMEs benefit frm a subsidy, either fully (2 ut f 30 respndents 6,7%) r partially (10 ut f 30 respndents 33,3%). One respndent did nt prvide an answer n this questin. d) Hw is the guarantee premium paid: by lump sum r by instalments? The payment methd is als an imprtant issue. The premium can be either charged as a lump sum upfrnt payment fr the whle duratin nce the guarantee is issued, r it can be paid by instalments (annually r with anther frequency). In general, 67% f the respndents charge the guarantee premium upfrnt by lump sum payment and 33% charge it mstly by annual instalments. Sme respndents charge either by lump sum r by instalments depending n the maturity f the cmmitment. The charts n the next page shw three grups regarding guarantee premium payment methds: In actual numbers, the respndents cmbine their guarantee premium payments methds, accrding t the duratin f the cmmitments, in the fllwing way: 12 P a g e

19 Guarantee payment methds By lump sum fr lng term & by instalments fr shrt term cmmitments 0 By instalments fr shrt term & lng term cmmitments 9 By lump sum fr shrt term & by instalments fr lng term cmmitments 7 By lump sum fr shrt term & lng term cmmitments Number f respndents Number f respndents The pie chart belw shws that the majrity f respndents charge a lump sum premium payment fr shrt and lng term cmmitments, fllwed by instalments premium payment fr shrt term and lng term cmmitments and a mix f premium payment methds (fr shrt term cmmitments by lump sum and fr lng term cmmitments by instalments). Guarantee payment methds 31% 45% By lump sum fr shrt term & lng term cmmitments 24% By lump sum fr shrt term & by instalments fr lng term cmmitments By instalments fr shrt term & lng term cmmitments 13 P a g e

20 e) Premium paid by instalments: hw are unpaid premiums recvered? The advantage f the upfrnt lump sum payment methd fr the guarantee scheme is f curse that in case f default, at any time, the risk is cvered fr the whle perid f the guarantee cmmitment. The payment f the guarantee premium by instalments in turn raises the questin, hw the utstanding premium is recvered if nt paid by a debtr that defaults. Fr the respndents (14 ut f 30) wh have their premium paid by instalments (including sme f the respndents with a mix premium payment apprach), the answers are: Fr 6 ut f 14 respndents, the unpaid premiums are nt recvered Fr 2 ut f 14 respndents, the unpaid premiums are deducted frm the guarantee s payment Fr 4 ut f 14 respndents, the guarantee is cancelled Fr 2 ut f 14 respndents, the agreement is renegtiated and then if nt recvered, they will prceed thrugh legal enfrcement 1 ut f 30 respndents did nt prvide an answer t the questin. f) Premium paid by instalments in the case f anticipated refund f the lan: what happens t the remaining premium? A similar issue arises fr guarantees, when the beneficiary repays his lan befre the riginally negtiated term. 15 members are nt cncerned by this issue, as they charge upfrnt lump sum payments. 5 survey participants did nt answer the questin, althugh they stated that they charge their payments by instalments. Amng the 9 effective answers: 2 ut f 9 respndents require the anticipated payment f remaining premium 3 ut f 9 respndents require a discunted payment f remaining premium 1 ut f 9 respndents refund f the premiums fr the uncvered perid, if paid at the beginning f the year 3 ut f 9 respndents: say that in case f anticipated refund f the lan, the payment f the remaining premium is nt required 14 P a g e

21 Number f answers 5. PRICING POLICY AECM members were asked the questin: Is the pricing plicy reviewed n a regular basis? Cncerning their pricing plicy revisin methds: 28 ut f the 30 participants t the questinnaire respnded this questin. exceptinal events (crisis, etc.) whereas 10 d s. 10 ut f 28 respndents answered that their pricing system remains unchanged but input variables change (Parameters fr risk assessment change, e.g. reference rates, sectrial reference data - the premium levels 19 ut f 28 respndents d nt review their pricing plicy as a rule n the basis f a prtfli evaluatin (e.g. defaults, payment delays, etc.) whereas 9 d s. 18 respnded that they d nt review their pricing plicy as a rule n the basis f affected t the different rating/scring categries are unchanged). And 18 respnded that this is nt their case. The table belw shws an verall verview f the cmbinatin f respnses received cncerning the pricing revisin methds used. Revisin f the pricing plicy: As a rule n the basis f a prtfli evaluatin (e.g. defaults, payment delays, etc.) As a rule n the basis f exceptinal events (crisis, etc.) 15 N N 6 Yes Yes 4 N Yes 3 Yes N Pricing system remains unchanged but input variables change (Parameters fr risk assessment change, e.g. reference rates, sectrial reference data - the premium levels affected t the different rating/scring categries are unchanged) 9 N N N 3 Yes Yes Yes Verificatin f the cnditins (yearly) but nt leading necessarily t a revisin f the pricing plicy 4 Yes 15 P a g e

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23 Cnclusins This survey has raised interesting infrmatin abut the manner in which AECM member rganizatins set up their pricing fr their guarantee prducts. The high respnse rate (30 members ut f 38) demnstrates the interest f such a survey. The jint individual member-sheets are a first-hand material fr members and culd, therefre, serve as a reference if they plan t adapt r review their guarantee premiums. One f the majr findings f this survey is the great diversity f wrking methds. This cncerns nt nly the cnceptual aspects (e.g. the maximum duratin f shrt-term, medium and lng term cmmitments) but als and especially calculatin plicies fr guarantee premiums. In this respect, nne f them can be identified as ptimal. Indeed, many factrs are invlved, including: The legal status f the guarantee scheme: public, private r mixed The presence r absence f a cperative culture The prvisin f guarantees The target custmers The length f guarantee cmmitments The direct r indirect subsidisatin by public entities The ecnmic and financial envirnment The pssible use f methds develped fr implementing the risk weighting dimensin in the calculatin f the guarantee premium. Etc Amng the key lessns learned frm a technical standpint, ne can particularly recall the fllwing: Fr shrt term lans, the basis fr calculating the guarantee premium is the nminal amunt f the guarantee cmmitment fr 64% f the respndents (in case f verdrafts) and 74% f the respndents (in case f redeemable credit cmmitments). With regard t guarantees in the medium and lng term, the members use the utstanding credit amunt accrding t the effective repayment schedule (44% f respndents) r the guarantee nminal amunt (33% f respndents). In 63% f cases, the guarantee premium varies depending n varius factrs and in 37% f cases, it is fixed. In 63% f cases, the bank pays the guarantee premium t the guarantee scheme and charges it partially r ttally t the beneficiary. The guarantee premium is paid within 67% f cases at nce upn the entry int frce heref, and in 33% f cases, the premium is paid n an annual basis. The pricing plicy - and thus guarantee premiums - is nt subject t peridic review at 19 members (ut f 28 respnses). At 10 members, different parameters and criteria fr risk assessment are tailred t imprtant develpments, hwever, leading t changes in guarantee premiums. This reflects the cncern f AECM members t ensure stability ver time cncerning levels f guarantee premiums, in rder t best ensure their missin is t facilitate access t credit. These bservatins and interesting lessns t mre than ne way up a base f infrmatin frm which further research can be undertaken t better understand key aspects f the cmplex nature f guarantee schemes. The added value t the ecnmy f this activity is nw widely recgnized and it is imprtant t maintain and develp it thrugh an apprpriate pricing plicy. 17 P a g e

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27 AECM, 2012 Editr: Secretariat General, AECM Eurpean Assciatin f Mutual Guarantee Schemes, AECM, Aisbl, Rue Washingtn 40, 1050 Brussels, Belgium Tel. / Fax: / (0) inf@aecm.be

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