Specialty Podcast: The "Evolution" of the Put Market

Intro (00:00):

You're listening to the Alliant Specialty Podcast, dedicated to insurance and risk management solutions and trends shaping the market today.

Ryan Babeu (00:09):

Hello everybody and welcome to Alliant's Trade Credit Podcast. I'm your host Ryan Babeu, here to discuss all things related to trade credit and risk management. I have with me today, Gary Tripp from Evolution Credit Partners. Gary, how are you doing?

Gary Tripp (00:23):

I'm doing well, and good day to you, sir. How are you doing?

Ryan Babeu (00:25):

Very well. Gary and I have known each other for close to a decade. He used to work at one of the larger carriers and then also with our organization before he transitioned to Evolution, which was a natural path for him given the amount of business he was issuing with what is commonly known as the put market. Gary, give us a little background as to who Evolution is and how Evolution got started.

Gary Tripp (00:48):

Sure. So Evolution is about four years old and we were spun out of the Harvard University Endowment. Our DNA is that of a lender and we lend primarily to non-bankable institutions. These are companies that can't go to, you know, a Citibank or a JP Morgan for a loan, and when that happens, they'll come to us. So we focus on the higher yield space. Now, Evolution has two sides of the house. We have our leverage finance side, which typically will do loans from 5 to 100 million. And we have our trade finance side, which incorporates supply chain financing, receivables financing and the trade credit protection. Now both sides of the house focus on higher-yielding names.

Ryan Babeu (01:36):

Right, and Evolution is not your traditional carrier in the primary credit insurance markets. They don't offer portfolio and key account policies the way that the traditional markets do. This evaluation is generally done on an individual basis, and as we mentioned and traditionally known and referred to as the put market, what began looking at distressed risk where financial disclosures are available. The type of coverage would be for bankruptcies and solvency and in large part to fill the void where traditional carriers were either overexposed or could not agree to cover. With all that being said, I think it's fair to say that Evolution's goal would be to get rid of the old verbiage "put market". Why is that, Gary?

Gary Tripp (02:18):

It's a personal goal of mine and I wanna just highlight something that you said. You know, Evolution, we are an asset manager. We are not an insurance company, nor do we offer an insurance product. The puts of old that you speak to, were these rigid and inflexible programs with contracts the size of an U.N. encyclopedia. You know, Evolution is offering a bespoke program that really benefits the client in a number of ways. So for those reasons, and a couple of reasons I'm sure we'll touch on, we prefer to call it trade credit protection or supplemental credit protection.

Ryan Babeu (02:58):

Right, and to segue off that, what specifically separates Evolution from the rest of the market?

Gary Tripp (03:05):

Sure. There are a number of things. I think to start with, and you talked about the DNA of Evolution that I mentioned earlier, where we're lending to non-bankable institutions. We are tasked with seeking out high yield. So the credit insurance carrier that I worked for provided a risk grade on every company globally from a 1 to a 10. An exceptionally strong risk was a risk grade 1, any bankrupt company was a risk grade 10, in a vacuum. The credit insurance carriers want to protect or provide insurance on a risk grade 1 through 6. Evolution's focus is on a single buyer on a risk grade 7 through 9. So that's the first thing that we start with. We offer non-cancelable agreements on a risk grade 7 through 9.

Ryan Babeu (03:52):

Yeah, and it's really focused on distressed risk. Define alternative placements and solutions outside of the core coverage of your trade credit policy. And generally, when we're dealing with Evolution, it's trying to find another solution for our clients, customers, that need the coverage and can't get it in their traditional credit insurance program. So we see a lot of added value services that we can provide to give them an alternative instead of just saying, No, tough luck. You're out of coverage. There's nothing that can be done here, and Evolution's done a really good job putting programs in place that not only cover the insolvency and bankruptcy portion, although that at its core what it's used for. But you've started to have some customized offerings and there are a few that may pique some interest. And I wanted to talk about some of those just a bit to get a good perspective of outside of the traditional language, what your offerings are.

Gary Tripp (04:50):

Yeah, so there's, there's a number of things that we're really excited about that we're offering to suppliers. You know, our agreements, as you mentioned, are non-cancelable agreements, on these high-risk 7 through 9 companies. And in the past, you know, the old put options were bankruptcy only and that created a number of problems both for the supplier and for the supplier looking to borrow against those receivables. So we've offered failure to pay as a triggering event, so that makes it more attractive to both the suppliers because they can file a claim or trigger me for someone who's unable to pay their bills, and we also cover bankruptcy. We've also added an extended termination date, which allows the client the sole option to extend the program, and it's really a risk-attaching feature. And both of these have never been done before within the "traditional" put market. And these kinds of enhancements are why we think really calling it a put doesn't do service to the product that we provide, which is why we like to call it trade credit protection.

Ryan Babeu (05:53):

Most certainly, and what I want to key in on is really that we set the put option or a tread credit protection program for a certain length of time, whether that be for three months or 12 months. And that's the typical date range. Am I understanding that correctly, Gary, you guys look for a three to six-month term?

Gary Tripp (06:17):

Yeah, absolutely. Our most common agreements are six months. The standard is 3 to 12 months. But what Evolution has in spades is common sense. We've certainly quoted programs on a 24-month basis, and when it's a good opportunity where we think it makes sense, we've done agreements that were as short as one month.

Ryan Babeu (06:39):

Yep, and the failure to pay an extended termination date allows you to make decisions within that timeframe that isn't just reliant on bankruptcy. And I think that that certainly sets you apart from the other put options in the market and how they are typically looked at.

Gary Tripp (06:55):

Yeah, absolutely. To my knowledge, nobody else is offering a bespoke program similar to ours that includes failure to pay and the risk-attaching feature, which is known as the extended termination date.

Ryan Babeu (07:07):

Now, does Evolution have any other products or offerings within the trade finance sector?

Gary Tripp (07:11):

We do. We do, with staying in trade credit protection, we have a brand new work-in-progress agreement that is so easy and common sense that folks often try and figure it out, saying it's too good to be true. But the longest story short is that our work in progress can cover any work in progress. It doesn't have to be custom goods and in the event of bankruptcy, the claim event is very, very easy outside of the trade credit protection, within trade finance and Evolution, we offer supply chain financing and receivables financing.

Ryan Babeu (07:52):

Again, more customized offerings. I like it. You know, certainly when it comes to the work in progress, what I found very interesting about the product was it's not the cost of goods that you are reimbursing as a traditional credit insurance carrier would. You are reimbursing the cost in which the policy was written as and where traditional carriers would expect you to salvage those goods and try to recover clients that issue with you under the work in progress. Also, get to keep those goods and do with them as they please. So really you are just covering the likelihood that a bankruptcy insolvency would take place during the period in which somebody has work in progress set up.

Gary Tripp (08:37):

That's exactly right. Well, when we looked at the standard credit insurance work in progress, we wanted to simplify the process both for, you know, our client and for Evolution. And the simplified process was, hey, they've incurred a bankruptcy event, they want to get paid, we just want to pay them. That's exactly what it is. So there's no reclamation of goods. There's no, quite frankly any kind of proof of deliveries. The process itself is extremely simple.

Ryan Babeu (09:07):

Gary, to end it, give me some ambitions and outlook of your future growth at Evolution.

Gary Tripp (09:11):

Yeah, well, Evolution, as I mentioned, has been around for four years. Our trade finance side really came about in August 2020. So we're just over two years. I think if you look backward before you look forwards, we've grown the business a 100% in 2022, and we expect significant growth in 2023. Now that stems from two areas. Number one is credit insurers start to pull back in the wake of a pending recession. We certainly see more opportunity, but I think the significant growth will come from our supply chain financing and our receivables financing programs.

Ryan Babeu (09:51):

All good things at Alliant Trade Credit, we hope to grow with you. Gary, thank you so much for coming on the podcast with us today. Look forward to seeing you soon. Take care.