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The fine art of calculating risk


Cash flow problems are one of the biggest dangers facing companies of all sizes and a leading cause of bankruptcy. When customers fail to settle their debts on time, the entire value chain can collapse leaving companies overextended and insolvent.

These chains are often influenced by a host of independent factors, making evaluating exposure and calculating risk a fine art. It is an art that Atradius has perfected over the decades, and while it is impossible to eliminate risk entirely, it is possible to minimize those risks and leverage their negative effects.

“Our mission is to strengthen our customers’ credit management and support their growth by providing them with accurate assessments of the payment default risk of the buyers,” says Head of Atradius Bonding Pietro Lanzillotta. “Atradius also ensures effective collection of overdue invoices and reliable protection against a range of contractural defaults.”

Atradius Bonding provides companies with a wide range of bonding products that strengthen their contractual relationships or secure compliance with regulatory bodies. A bond can be issued to hedge against all forms of risk, from non-performance of contractual obligations for whatever reason to non-fulfilment of financial payments due. A bond is a form of insurance that is becoming increasingly popular in both the public and private sectors.

“A typical example of when a bond may be required could be a government road-building project,” explains Mr. Lanzillotta. “If a national government or local authority wants to build a new road, they invite bids for tender before awarding the contract to the winning bidder. The company that wins the contract is then required to issue a performance bond, which is generally set at a certain percentage of the value of the total project. This bond acts as surety for the government or local authority that the work will be carried out in accordance with the contract. It formalizes the extra costs for not fulfilling a contractual obligation.”

Performance bonds are just one of an extensive range of tailored bonding products offered by Atradius. The product range currently covers advance payment bonds, bid bonds, compliance bonds, customs bonds, contract bonds, judicial bonds, maintenance bonds, tax duty bonds and environmental bonds, but continues to evolve in accordance with market needs.

“Environmental or climate bonds are becoming increasingly important as environmental concerns come to the fore in the public consciousness. Corporate reputations now frequently depend on a company’s environmental record,” says Mr. Lanzillotta. “A bond insures the beneficiary that a third party ‘the principal’ will meet its contractual, legal or regulatory obligations.”

Atradius leads the French, Italian, Nordic and Spanish non-banking bonding markets and is fielding an ever-increasing number of international enquiries for its bonding services.

“We are present in eight different countries with our bonding products and are looking at expanding into new countries and markets,” says Mr. Lanzillotta. “The key markets for our bonding business are Italy and Germany with a combined volume of 500 million USD. Of course, the uncertainty in Europe regarding the euro and the debt crisis has benefited our business, which tends to run anticyclically.”

Atradius only opened its German office last year, but already the market is developing strongly and offers huge potential for the future. The company is currently looking into setting up bonding subsidiaries in the UK and Switzerland as its business becomes more international in nature. Whether its customer is operating domestically or intentionally, this local presence is a major advantage in negotiating local or cross-border bonds.

Another key advantage is Atradius’s focus on technology. “We have developed a tool that allows bonding to be conducted entirely online,” says Mr. Lanzillotta. “It is a very convenient and efficient way to do things.” A pilot project that has been underway in the French market for some time means that 85% of French bonds are already issued online.

International bonds are becoming a mainstay of the bonding division as more and more corporate clients look for partnerships that go beyond the normal bank relationship. Through its own offices and a network of business partners, Atradius offers access to guarantee facilities in international markets. Atradius has a global presence through a network of 160 offices in 50 countries and a team of experts numbering 3,300 people around the world.

“We have access to credit information on more than 200 million companies worldwide, and this information, as well as a thorough understanding of the various markets in which these companies are active, form the basis of our risk assessment,” says Mr. Lanzillotta.

Atradius can trace its history back to 1925 through the foundation of credit insurer NCM in the Netherlands. In 2001, NCM and the German credit insurance group Gerling Credit merged to form Gerling NCM. In 2003 a rebranding exercise introduced the name Atradius for the group. With total income of over 1.6 billion EUR, Atradius is rated ‘A’ by the leading bond credit rating companies Moody’s and A.M. Best for its financial strength as an underwriter, ensuring that customer risks are covered here as well.

The bonding division was created in 2005 through the merger of all country offices where Atradius had bonding operations. Its biggest potential market is also its newest. “Our focus is definitely on the German market in the short term with other countries also on the horizon,” says Mr. Lanzillotta. “The Italian market is also an important market for us although it has suffered in recent years.”

Atradius focuses mainly on public works and civil engineering bonding solutions, where it enjoys a strongly consolidated position and is regarded as the leading expert in this field. A focus on austerity in the national budgets of a number of European countries has, however, meant that a number of 38public works projects have been put on ice or cancelled altogether. For the future, Atradius Bonding is keen to improve its digital services.

“One of our ongoing projects is to develop a more advanced IT solution for our business applications,” says Mr. Lanzillotta. “We hope to achieve some key milestones with this project this year.”

Another focus is to expand its geographic presence to cover the majority of Europe by 2020. Atradius’ overall mission is to expand its tailor-made product offerings in all departments. A particular focus is on developing high-value products in commercial and political risk insurance for large and complex transactions. Its geographic ambitions are focused on exploring new opportunities in emerging markets, particularly in Central and Eastern Europe, Asia and the Americas.

Atradius already enjoys a leading position in the risk management market but will strengthen its competitive position and reduce profit volatility by maximizing cost efficiencies for its and its clients’ benefit.

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