Receivable Put Cost – Explained
How much does a Receivable Put cost? Typical of finance, the market likes to hide behind a mask of complexity. We will help you decode the mystery and use information to estimate the cost to protect yourself from a customer bankruptcy.
The receivable put market is not (yet) a live trading floor, where costs are transparent and publicly available. Although we help you estimate, the only way to find the cost of a Receivable Put is to get pricing. Swift makes this process simple and can help you access and compare all providers.
What Determines Price?
Market Driven Factors
- Hedging Cost: The cost for a provider to hedge their risk – CDS and bond spreads
- Competition: There are many providers. With competition, pricing suddenly becomes flexible!
- Demand: High demand for a specific customer = increased price
Risk Driven Factors
- Probability of Default: The chance that your customer will default during the contract
- Contract Term Length: The longer the receivable put term, the more likely a chance of default
- Basis Risk: If the provider is hedging, how much risk may not be covered by their hedge
There are also Provider Capacity limitations. Basically, a provider has appetite for a certain amount of risk. The closer they get to their capacity limit, the higher they charge in price.
How Much Does it Cost?
It depends! The answer you were looking for, right? It’s generally not cheap. However, a Receivable Put is laying off the default of your most risky customer(s). Also keep in mind that protection is fully non-cancellable and provides 100% coverage against your receivables.
Below is a cost summary of live market data from approximately 50 publicly traded companies. The average for Investment Grade companies is .31% per month, where High Yield goes up to nearly .87% per month.:
Furthermore, cost below is stated as a % of coverage on a per month basis, for a 12 month contract. Interestingly, the standard deviation is substantially higher for High Yield credits, meaning price is much less predictable in the high yield space.
We provide cost averages, but what about the high end? Well, prior to default, we were seeing the price to protect receivables on Sears at around 4% per month. So that gives an idea of worst case scenario.
Receivable Put cost is fluid and can change daily. Don’t let this pressure you, there generally is some stability. However, after an earnings reports or a major credit event, a pricing change can be immediate. The only way to truly lock in a price is to execute the contract.
How can you get the best price from the market? We have several tips that should help.
- Don’t start looking at a Receivable Put late in the credit cycle! This is like looking to buy stocks that have already spiked. It is by far the most common issue we see.
- Check multiple Providers. A price from a single provider does not represent the market. Use Swift to help you provide a true comparison – of both the price and contracts.
- Pass cost to your customer! When given a choice of not getting your product/service or paying cash in advance, a customer will often gladly take on some of the cost of a Receivable Put. Again, don’t be late in the cycle or this strategy is less likely to succeed.
Although the Receivable Put market doesn’t provide up to minute live pricing, you can use public information and our market information to make an educated guess.
Our key advice, for high risk customers you should always be proactive in the evaluation process. It costs you nothing to get real pricing and provides an opportunity to watch the market trend and buy on low dips. Check it often.
If you start evaluating a Receivable Put only after a major credit event (rating agency downgrade, earnings release, credit insurance canceled, etc.) you will pay much more and may be stuck in a situation to make a decision under pressure.
Swift Credit Risk is the market leader in providing Receivable Put Options to protect receivables or tenant rent flow from the bankruptcy. We are your consultant to simplify the process and source the lowest cost in the market. Contact us if we can be of assistance as you evaluate a Receivable Put.