Bankrupt buyer risk characteristics in export trade credit insurance

What can buyer bankruptcies teach credit insurers? Drawing on practical recovery experience, this article identifies common risk characteristics and lessons for underwriting.

In recent years, both reported losses and claims paid arising from bankruptcy risks under SINOSURE’s export trade credit insurance have surged rapidly. Loss mitigation – both before and after claim settlement – can be particularly challenging from the perspective of recovery practice in bankruptcy cases. As a result, the characteristics of buyer bankruptcy risk and the practices of risk management in this area merit closer examination.

Buyer risk characteristics in bankruptcy cases

High-leverage financing costs behind rapid expansion

Statistics indicate that over 50% of bankrupt buyers experienced rising financing costs due to the combined effects of high leverage and high interest rates. Such buyers often operate in cyclical industries or pursue scale‑driven strategies, tending to adopt aggressive business expansion plans. They feature high leverage and heavy debt reliance, using such structures to support mergers and acquisitions, capacity expansion, or market‑share battles, leaving financing burdens persistently high. When the macroeconomic situation turns, particularly during the recent interest‑rate hiking cycles of the US Federal Reserve and the European Central Bank, their vulnerabilities become fully exposed: short‑term debt pressures spike sharply, operating cash flows fail to cover financing costs, and eventually bankruptcy ensues.

Liquidity risks from high‑inventory operations

Approximately 20% of bankrupt buyers suffer liquidity problems stemming from high inventory levels and slow turnover. These buyers often make strategic misjudgements about market trends and adopt high‑inventory policies to hedge against potential raw‑material shortages or price hikes. If they fail to effectively manage inventory turnover efficiency, market changes such as overcapacity, sharp price declines, or sudden contractions in end‑consumer demand, turn excess inventory into a heavy financial burden, directly triggering substantial asset write‑downs. At the same time, slow turnover blocks cash flow, rapidly deteriorating liquidity. This dual blow of asset impairment and liquidity crisis can push enterprises into bankruptcy.

Weak adaptability to abrupt external changes

Based on our analysis, about 75% of bankrupt buyers rely heavily on a single source of competitive advantage and are therefore vulnerable to severe shocks when the external environment undergoes significant changes, including shifts in the international economic environment and industry policy, as well as structural upheavals in technology and consumer behaviour that reshape the industry’s established competitive landscape and profit models. If a buyer’s earnings structure has long been overly dependent on one specific external condition, when such upheavals occur, its traditional cost advantages, market channels, or product demand can vanish rapidly, leading to a sharp revenue decline, runaway costs, and ultimately bankruptcy.

Case in focus: A Chilean telecommunications restructuring

A leading Chilean telecommunications operator had been steadily improving its performance after being acquired by an investment company, with user numbers growing rapidly and its market share approaching 20%. In March 2024, however, S&P Global downgraded the issuer’s credit rating from B to CCC and lowered the related debt ratings to CCC with a negative outlook, citing unfavourable information such as sluggish refinancing negotiations for large‑amount US dollar bonds nearing maturity, tight liquidity, persistent negative free cash flow, and heavy 5G capital‑expenditure pressure. S&P judged that if refinancing remained blocked, the company would most likely initiate debt restructuring, which would constitute a substantial default. An upgrade would be possible only if the company successfully completed refinancing under the original terms and significantly improved its liquidity. In April 2024, the buyer applied to the court for bankruptcy reorganisation. The case offers three principal lessons.

Monitor corporate operating pressures during interest‑rate hiking cycles

In this case, the US dollar tightening cycle raised the interest rate and Chile experienced a rapid increase in financing costs, domestic currency depreciation, rising inflation, higher unemployment, and a general economic slowdown. These affected overseas financing costs, profit repatriation, profitability, and the financial stability of the business.

Therefore, when assessing buyer credit risk in a rising‑rate environment, special attention should be paid to the effects of higher domestic interest rates and local‑currency depreciation. For enterprises that rely on external financing for working capital, it is essential to monitor the maturity profile of large debts and the feasibility of refinancing. Businesses with weak profitability, tight operating cash flows, and persistently high leverage are particularly prone to default and insolvency when multiple adverse factors coincide.

Conduct systematic risk assessments for telecom operators

The telecommunications industry is a fundamental and strategic sector of national economies, closely related to people’s livelihood and generating job opportunities. Telecom operators own spectrum resources, fibre‑optic cables, tower transmission facilities, and large subscriber bases delivering stable cash flows. At the same time, because core technologies are constantly evolving, operators must invest enormously in building and upgrading extensive communications networks and maintaining critical equipment, imposing substantial and rigid debt burdens.

In recent years, intense market competition has meant that revenues from broadband internet, mobile data, cloud computing, big data, and other services have not always been sufficient to offset the decline in traditional voice and SMS service income, making profitability a concern. Moreover, operators face disruption from low‑cost communication applications provided by internet companies. Bankruptcies, restructurings, and mergers are frequent in the sector.

Use digitisation to enhance risk assessment capabilities

Owing to the special operating characteristics of telecom operators, credit insurers need to develop a rating system better suited to the specific risk profile of such buyers. Against this backdrop, SINOSURE has established a proprietary global telecom operator credit rating model, drawing on the methodologies of top global rating agencies and integrating the risk characteristics of telecommunications buyers.

The model comprises six elements: enterprise scale, performance, profitability and efficiency, leverage, and debt‑servicing capacity, financial policy, and underwriting records. Each element is assigned a different weight, assessed based on different circumstances, and the calculated scores are mapped to a final rating. Empirical testing shows that this rating model can effectively assess the credit risk level of telecom operators.

Reducing losses from bankruptcy risks

Develop a systematic view for risk assessment

For buyers with high inventory levels, more attention should be given to liquidity indicators such as turnover days, alongside exposure to price volatility. For buyers with relatively narrow competitiveness, in addition to the customer or supplier concentration and their dependence on policies or technologies, the resilience of their profit models to external technological and policy changes should also be considered.

For buyers that have previously experienced bankruptcy, insurers should review whether operational deficiencies or industry‑systemic risks have been resolved, and whether their ownership structure, management team, and business model have substantially improved.

Improve risk-monitoring mechanisms

Post‑underwriting monitoring of key markets and critical industrial chains should be strengthened, alongside the collection, integration, and utilisation of risk information. Historical cyclical patterns should also be taken into account. At the same time, government policy adjustments and macroeconomic indicators – including interest rates, exchange rates, employment, and inflation – in high‑risk countries should be regularly monitored. When acute or sudden risks arise, insurers should conduct timely risk scans and reduce exposure in response to real‑time feedback from the market.

Expand recovery tools

For jurisdictions where the relevant laws permit, and for buyers with high inventory ratios or slow turnover, as well as high‑value and readily resalable goods categories, exporters may consider incorporating retention-of-title (ROT) clauses or third‑party escrow accounts in contracts to improve recovery in bankruptcy proceedings.

During the loss‑mitigation process for bankruptcy‑risk cases, when a buyer shows potential for recovery and has new limit requirements, appropriate support could be considered to help the insured secure key‑supplier status or more negotiating power, thereby reducing losses for both the insurer and the exporter.