Covering your risk

It started over three decades ago as a small financial company to cover bonding obligations and now covers credit security and financial risk around the world, but Contractors Bonding has never forgotten its roots.   BY ALAN TITCHALL.

May_175.jpgThings haven’t changed that much for contractors digging deep into their pockets to come up with contract performance bonds.

Bank guarantees for bonds in these financially tough times are as difficult to procure as they were back in 1973 when contractor Noel Dick thought there had to be a better way and set up Contractors Bonding Limited (CBL). Surrounded by a board that included ex PM Sir John Marshall, he started writing contractor’s bonds, a business that quickly evolved into other areas of financial bond risk.

His original scheme for contractors is as effective today as it was back then – instead of relying on securities held at the bank, you have your bond (usually 10 percent of the contract’s value) underwritten in return for a charge, between 2 and 2.5 percent of the value of the bond.

The company set off in an expansion mode in 1996 after it was bought by a syndicate that included Peter Harris, who is the company’s current managing director and a financial risk and structured credit underwriting specialist with an investment banking background.

May_1.jpgOver the past decade Contractors Bonding has expanded to become, not only the country’s largest provider of credit surety and financial risk in New Zealand, but one of a few niche insurance companies offering a wide range of credit insurance and financial surety related products through an international distribution network. These days, 95 percent of CBL’s business is sourced from overseas risk, says Harris, through its long-standing partnerships with international rated insurers.

“Today we are able to provide a wide range of contractors bonds including bid bonds, contract performance bonds, maintenance bonds and bonds in lieu of retentions,” Harris says.

In addition to contractors, CBL’s New Zealand and overseas clients include roading authorities, government ministries, airlines (through travel agency bonding); municipal authorities and local bodies.

However, the company remains close to its heritage, Harris says, and its primary area of expertise of providing performance bonds to the contracting industry.

“Contractors are a very important part of our business and we are extremely conscious of our heritage in this industry, and this is reflected through our ongoing involvement with, and support of, the New Zealand Contractors Federation.

“We remain a key member and supporter of the federation and participate at all its conferences and trade shows.”

A lot of federation members have international business and CBL is in a position of covering overseas contracts as well, he adds.

As banks tighten up on their lending and focus on securities, CBL’s services are even more important today than they have ever been, says Harris.

“Banks treat bonding exposure as the same risk as if they had lent the client the money. Contractors, by splitting their bonding requirements from their banking needs, are able to maximise access to working capital. We don’t interrupt their banking covenants or securities.”

There’s also the advantage in that CBL has been dealing with local councils and authorities such as the NZ Transport Agency for over 35 years and has built up trust.

“We have found every man and his dog finance company has been issuing bonds and guarantees to the likes of councils over the past two or three years, and the fact that some of them have been called but not honoured is a real concern, because it undermines the integrity of bonding across the board. None of these companies had proper facilities or re-insurance treaties – they simply signed a piece of paper.

“Because of this, some councils would rather have a bank guarantee, but when you sit down and explain that their bad experience wasn’t about the bonding but the company that provided the bond – they see the light.”

Although CBL is a fully compliant insurance company under the jurisdiction and monitoring regime of the New Zealand insurance regulator, CBL sticks to what it does best – credit security and financial risk products – and does not get in involved with traditional property and casualty risk. The company also has offices in Kuala Lumpur and London, and is obviously very good at what it does.

“In this business you have to read financial statements and balance sheets and that’s not a skill generally available to the insurance traditional market – more of a banking skill,” says Harris.

CBL has not only kept its head high and dry in the face of the global financial crisis but had its best year ever in 2008.

“This year our plan is to repeat last year’s performance.”

Mindful of the smaller contractor as much as the larger ones, CBL has recently developed a warranty for small contractors’, that are members of the federation, to offer over their work.

The warranty covers a three years period for loss of deposit paid by a client where work hasn’t started; non completion of works; and defects. More information on this policy can be found at the CBL website

Contractor Vol.33  No.4  May 2009
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