Can you insure your way out of weak docs?

Could you lend more to a borrower if an insurer covered part of the credit risk?

When Angela Chang started explaining the possibilities at our Covenant Exchange roundtable in Singapore, I had so many questions that I more or less hijacked the conversation. So I invited Angela and her Texel Asia colleague Jamie Stork to continue it on the Arc of the Covenant podcast.

Angela calls credit insurance the "secret sauce" banks have been using for years. For private credit lenders, that raises an interesting question: what could you do with a lending opportunity if you didn't have to retain all the credit risk?

Consider a borrower you'd like to support with a larger commitment. You know the business and want to do more, but there's only so much exposure you're comfortable keeping. Angela explained how sharing some of that risk with an insurer could help support a larger commitment. The lender still funds the loan; the insurer provides agreed protection against non-payment.

The possibilities go well beyond buying a fixed percentage of cover on one loan.

Jamie described a market that has developed from its trade origins into something much more adaptable. Angela explained that cover can be arranged for individual assets, portfolios, or particular layers of risk. Political risk insurance can address specific concerns, such as currency inconvertibility or expropriation.

That changes the starting question. What would you actually want to insure, and what could that allow you to do?

It also explains why a conversation with a broker can be useful before you've decided to buy anything. Angela described the broker as an extension of the deal team, helping lenders understand what's available and how it might fit the problem they're trying to solve.

Of course, I couldn't resist asking about the docs. If insurance can do all of this, can it protect you from weak documentation? What does an insurer need to understand about the loan, and about you as the lender? What happens when the borrower stops paying?

Those questions took us into some of the most interesting parts of the conversation, including the support a broker can provide through restructuring, claims, and recoveries.

The questions for your own book:

1. Which borrower, sector, or country exposures are closest to the concentration limits in your fund documents?
2. How do those documents treat insured exposure when calculating those limits?
3. What payment obligations, maturities, and repayment schedules would any insurance need to cover?

Listen to the full conversation on Spotify and Apple Podcasts.