IRC has relationships with the leading banks and hedge funds offering Put Options and can help structure, evaluate, and obtain Put Option contracts. The “Put Option” was created in response to a demand by the vendor community for a risk mitigation product that covered distressed and “difficult to insure” accounts. A Put Option, which is a type of credit derivative, can be purchased from a “Hedge Fund” to protect against losses due to the insolvency (chapter 7 or 11) of U.S. domiciled buyers. Protection for publicly traded European or Asian companies may also be available in certain situations. The protection offered by a Put Option is somewhat different than traditional credit insurance.

A Put Option offers protection only for a defined period of time. In order to receive a benefit from the product, the bankruptcy or “Loss Event” must occur during the life of the Put Option contract. This is different than credit insurance where the Loss Event can occur outside the policy period, provided the invoicing occurred during the policy period.

A Put Option enables a vendor to ensure a certain recovery (usually 90-95%) on a distressed account for a certain time period (usually 6-12 months) in the event the obligor/customer defaults on payment due to a bankruptcy filing or other defined insolvency event. Pricing for put coverage (the “Premium”) is based on several factors, including the particular obligor’s creditworthiness, product supply and demand, and the size and duration of the put contract. Premiums are normally payable up-front, but for larger amounts other payment frequencies can be negotiated.

In the event of a bankruptcy the owner of the Put Option has the right to “Put” or sell a specific amount of open account receivables (the “Put Value”) to the Hedge Fund. The fund is obligated to buy the receivables and will pay the seller a percentage of each invoice sold. This percentage is called the “Strike Price”. Only receivables recognized by the bankruptcy court can be protected. Provisional payouts can be made subject to a final acknowledgement of the debt by the court.

Put Option prices are higher than credit insurance premiums. Put Options are only viable for risks that traditional credit insurers will not insure or where single-buyer coverage is not available. For a Put Option to be written on a particular company, they must have publicly-traded debt and or stock.

Vendors that purchases a Put Option will do so for one of several reasons:

• Short-term fear of bankruptcy
• Protect market share with the distressed client company
• Continue sales to distressed client until condition improves
• Honor contractual obligations

Example of a hypothetical Put Option transaction:

Vendor: Acme Company, Put Issuer: Hedge Fund XY, Debtor: Winnie Dixie,
Put Value: $1,000,0000, Strike Price: 90%, Premium: 1.0% per month or 12% per year,
Loss Events: Chapter 7 or 11, Annual Premium: $120,000, Protection Period: 12 months

In event of Debtor’s bankruptcy, Vendor receives $900,000. After subtracting premium paid, net protection is $780,000 on $1mm A/R exposure.