Mike Ramsey Vice president, Wells Fargo Collateral Trust
The topic of collateral has been discussed extensively over the past
few years and for good reason. Many risk managers and treasurers consider it one of the most pressing issues they are facing today. Despite this fact, I am surprised how little is still known about the options corporations have before them when it comes to satisfying their collateral requirements. Collateral has always been an issue for corporations to address. Whether it’s for a traditional corporate deductible programme, a surety bond or captive programme, it has gained attention in recent years due to the meltdown in the credit markets. What do the credit markets have to do with it? Simply stated— until a few years ago—letters of credit (LOCs) were far and away the most common way that corporations posted collateral. There are a few reasons why this was the case, but one of the primary reasons is that it was the only option known, but clearly not the only option available.
When the financial markets started to collapse in 2008, one of the
first things that happened was credit became very expensive and difficult to obtain, the effects of which we are still seeing today. For corporate ‘deductible programmes’, many firms would use their corporate credit lines, which had fixed costs associated with a defined term. As these terms started to expire, corporations were seeing their cost of credit skyrocket, often doubling and tripling at renewal. For captives, even though the LOCs were ‘cash collateralised’, we saw similar increases in LOC costs. In addition, as many banks’ balance sheets started to deteriorate and their credit ratings suffered, the carriers themselves began feeling uncomfortable with the amount of LOCs they had posted to them from the same banks. All of these factors led to the carriers, captives and corporations looking for other alternatives to the traditional LOC.
US Captive . April 2011 31
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