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Here's to the health and happiness of your bankers!

Here's to the health and happiness of your bankers!

In the wake of the post-Julien (cotton) era, the bankruptcy of Cafe Soluvol Brasilia, Sprague & Rhodes, General Coffee, Drexel, and Junque Bond Financiers in general, several important commodity bankers made it clear that coffee merchants will be under new constraints to be extra credit-worthy. You might say that when big bank financing sneezed, that the traditional, collateral based form of coffee financing was next in line to catch a cold.

Meanwhile the health of Coffee Merchants' credit lines has never been more important - in January over 100,000 bags could have been sold by smaller, capable merchants to anxious mill buyers, but for the sake of sufficient credit lines.

Fortunately, operating credit can be fortified - there exists financial flu shots - plenty of fiscal vitamin C is available!

Enter good coffee insurance ... The second basic benefit of good coffee insurance is the provision of a banker's letter and loss payable endorsement made out in favor of your favorite, deserving bank. These endorsements are usually freely given upon the issuance of the coffee policy.

While the bankers letter and the loss payable endorsement documents have evolved over the last hundred years, the basic function has remained unchanged: to protect bankers from every physical threat to loss of coffee collateral - anywhere.

Recently a prominent commodity banker said: "We still see opportunities in today's coffee financing, but on a very selective basis. Naturally, when the coffee merchant presents his credit package to us, we expect to find the (insurance) banker's letter and loss payable endorsement in order, and in an amount that well exceeds the proposed credit line...."

What makes the bank endorsements so important? Let's start by examining: The banker's letter - an extract of the coffee policy covering salient points i.e.: insurance attaching automatically on all coffee at the merchants' risk - continuing until paid for - on such terms as - all risk of physical loss, including fumigation, slackage, contamination, etc - from warehouse to warehouse, in the hands of any bailee - covering war and strikes for fob purchases, etc. and ... specifying dollar amounts or, in the case of some policies, amounts unlimited by location.

In other words, the banker's letter cuts the mammoth coffee policy with its intricate and special wordings, down to a single page, stating the mimimum the banker must know, ie; that basic clauses are in effect.

Next, and possibly more important, is the loss payable endorsement - an agreement made directly with underwriters to recognize the merchant's bank as the assured in the event of loss. The endorsement usually contains the magic clause that further protects the bank from "... omissions, errors, or other failures ..." that may occur at the direction of the coffee merchant and would have the effect of "busting" normal coverage.

In other words, when the coffee insurance loss payable endorsement is in place, virtually no act by the coffee merchant can undo the coverage available to the bank, for the bank's interest only ... a sort of no-fault safety net cover.

The loss payable endorsement is especially useful in a coffee policy. Like many other policies of insurance, binding obligations and warranties of conduct exist between an assured and underwriters. For example: maintenance of clear space, good subrogation rights against carriers, prompt notification of loss, and the obligation to ship sound coffee at all times etc. But in the coffee policy, these warranties are vital and well enforced with the intent to reduce the risk (and cost) associated with this valuable and volatile commodity.

But such warranty provisos cannot be allowed to operate to the detriment of the merchants' bank, say in the denial of a claim payment to the bank as an innocent loss payee following catastrophic loss, otherwise the coffee insurance policy itself would be severely debased.

So in addition to the above - there is a cancellation and claim assertion clause available to the bank, usually 10 days notice, adding a further level of comfort and physical security to the coffee merchant's collateral - protecting the banker and his coffee "position" anywhere. In fact I've discovered cases where claims wound up being paid twice - the second payment made to the bank purely because the assured failed to countersign the first bonafide payment over to the bank!

How can all of this pull together? Again, the comments of a prominent commodity banker are instructive: "... when reviewing the coffee merchant's credit package, insurance does not by itself make or break the credit line. However, the absence, or inadequacy of the banker's letter and loss payable endorsement is usually a very large red flag indicating that something could be very wrong with the applicant's organization and credit worthiness ..."

Taking the next logical step, I asked a number of commodity banks if the provision of a loss payable endorsement and banker's letter, well prior to credit line review, would warrant special treatment. "... Possibly ..." came the answer back: "... if the rest of the coffee merchant's credit package is as well organized as the coffee insurance and especially the loss payable endorsement, then the merchant is on much better ground to ask for interest rate concessions, perhaps better by a quarter point or more ..."

But most importantly for today and tomorrow, is the ability to maintain credit lines in good standing, to be ready when opportunities abound for the sale of coffee anywhere - domestic or export. It is our raison d'etre in service to the coffee merchant.
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Title Annotation:commodity bankers tighten credit policies toward coffee merchants
Author:Rekerdres, Ted
Publication:Tea & Coffee Trade Journal
Date:Jul 1, 1990
Words:902
Previous Article:The plan for a new Brazil creates a new concept for coffee commerce.
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