TOKYO — Despite the recent turmoil in global equities markets, the stock of Japanese accounts receivable insurer eGuarantee has steadily climbed thanks to a business model that shines especially in turbulent times.
The shares marked a record high of 1,996 yen on the Tokyo Stock Exchange on April 21. The stock price has increased tenfold in seven years or so, propelling the company into the ranks of so-called tenbaggers.
A group company of trading house Itochu, eGuarantee insures businesses against defaults on payments owed by clients. It has apparently added the equivalent of hundreds of millions of dollars to its outstanding guarantees in the January-March quarter as companies outsourced credit management operations, unable to handle them while keeping workers at home.
“We’ve had a flood of inquiries because of the coronavirus,” President and CEO Masanori Eto said.
eGuarantee had already been booming before COVID-19, since fewer businesses were going bankrupt thanks to years of economic expansion. Net profit is on track to increase for the 15th year in a row through fiscal 2019.
The company receives inquiries from about 4,500 clients a month. About 80% of current customers were introduced through partner regional banks from across Japan.
eGuarantee offers coverage for payments owed by about 70,000 businesses, from fledgling startups to major corporations. It screens 1,200 new accounts a day, using its extensive database of companies, their financial results and track records on payments, and personal assets owned by their leaders. It also calculates the possibility of these businesses going bankrupt, based on how others in the industry have fared, reflecting this in premiums.
For smaller companies with little publicly available data, eGuarantee relies on information from its own clients. It also tracks what it learns through word of mouth, such as whether a company is behind on payments or has switched to paying with notes instead of cash.
Another key to eGuarantee’s success is transferring risks to its seven private funds open to institutional investors and startups. eGuarantee shoulders less than 20% of payouts for accounts gone bad, with the rest coming out of these funds.
The funds, which operate for an average of seven years, do not allow investors to pull out, a safeguard against them fleeing in a financial crisis. In return, they receive over 10% in dividends once a year.
eGuarantee aims to nearly double its outstanding guarantees to 800 billion yen ($7.5 billion) from just over 400 billion yen and is aggressively taking on new accounts even in such virus-hit industries as restaurants and hotels. “I accept that payouts will increase temporarily,” Eto said.
But the company is expected to face some headwinds in its push for growth. Its calculations on the likelihood an account will fail are based on past data, such as the 2008 financial crisis. The economic upheaval from the pandemic has the potential to exceed the projected fallout based on past turmoil. It is now setting premiums that account for greater volatility in the market but could still take a hit to earnings if bankruptcies spike over the coronavirus.
Then there is the relatively low profit margin, as the company makes about 2.5 billion yen in pretax profit a year. eGuarantee now receives about a 1.5% premium from its clients. The low fee has helped it find new customers but could lead to difficulties down the line.