For Brazil Cos, Credit Risks Rise Even For US-Bound Trade

SAO PAULO --The United States market used to be a safe haven for Brazilian exporters, but with the U.S. economy on the brink, their once reliable northern clients have suddenly become a major, costly source of credit risk.

The high cost of obtaining credit insurance, or the threat of having such policies denied outright, has become yet another handicap for Brazil-U.S. trade that's already hobbled.

"It doesn't make a difference how strong the Brazilian client is, or the product. The problem is the credit quality in the U.S.," said Fernando Blanco, Brazil country manger of Coface, a French company that insures trade finance operations.

It used to be that when Brazilian exporters shipped to the U.S. they could be certain their American clients would pay them back. Now there is a real risk of default. And for many trade finance insurers, the U.S. now ranks with Argentina and Ecuador for risky business.

The cost of insuring financing for Brazilian exports is rising. Three of the big multinational trade finance insurers have raised premiums by at least 10% over the last two months alone, according to brokers at International Risk Consultants, or IRC, in Sao Paulo. All three are making it harder for Brazilian companies to get full coverage on payments due from receivables.

Brazilian companies selling, say, petroleum or beach sandals to the U.S. are now liable to find the country's biggest credit insurers turning them down.

"The U.S has suffered a profound slowdown and a lot of credit is not being paid back, both domestically and for exporters," Coface's Blanco said. "We are requesting greater financial disclosure and approving U.S. shipments only on a case by case basis."

Trade credit insurance is a risk management product offered by private companies like Coface, or government-owned export credit agencies, to exporters who want to protect themselves from client insolvency.

"We have to be way more careful with credit insurance," said Gilson Bochirnitsn, CEO of Euler Hermes, another trade finance insurer, in Sao Paulo. So far, he said, the U.S. has not posed a problem in terms of rising claims. Rather, Bochirnitsn explained, "We are seeing a lot of Brazilian companies wanting to buy insurance because they are afraid they're not going to get paid back."

Brazilian insurers are reacting to the credit crisis in three ways, said Hugo Carson, a broker at IRC. They are either raising annual premiums, denying new policies for certain destinations or goods such as construction materials bound for the U.S., lowering the limits of their credit exposure, or a combination of all three.

"The biggest problem is that Coface and Euler Hermes are multinationals. (Their operations) are losing money in the U.S. and Europe as claims increase. Claims aren't rising in Brazil but these companies have to cut their risk exposure wherever they can," Carson said.

Insurers said they expect premium increases to continue in 2009 as Brazilian companies continue to pay a price for poor bank management in the U.S. and Europe.

The insurance problem also has many exporters with annual receivables of up to 300 million Brazilian reals ($128.2 million) finding it harder to obtain government-backed trade finance from the Banco do Brasil's Pro-Ex credit line, Carson said.

"We were expecting a big boom in Pro-Ex financing to make up for private financing cutbacks. But the companies that have access to it are also having trouble getting their limits approved by insurers and so they often end up not getting the loan," Carson said.

For his part, Rogerio Vergara, Brazilian director of Mapfre Seguradora de Garantias e Credito, said his company already has a policy of refusing deals for certain destinations seen as high risk, he said, adding that this approach "isn't entirely dependent on today's news."

The credit insurance problems are exacerbating an ongoing credit crunch in Brazil, adding to the channels through which the global crisis is reaching South America's biggest economy and compounding a vicious cycle of shrinking international trade. Local exporters facing scarce credit and scarcer trade finance insurance will be unable to offer better terms to their buyers, and that's going to continue hurting trade flows, said IRC's Carson.

Only two months ago, the consensus among government officials was that Brazil would be relatively protected from the devastating financial blowouts in the U.S. and Europe. But with the economies of Brazil's trading partners now slowing or in recession, that forecast is looking less solid with each passing week.

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-By Kenneth Rapoza, Dow Jones Newswires, 5511-2847-4541, kenneth.rapoza@dowjones.com