Summary
¦ Appetite for insuring risk has grown among credit insurers.
¦ COFACE reports a shift change in risk scoring mechanisms.
¦ Cash management is key.
¦ Further timber sector failures are expected in 2011.
During 2009 it was all kicking off in the credit insurance market, with many timber traders seeing their cover reduced or pulled, sometimes with little notice.
There were accusations that the timber/ construction trade was being tarred with the same brush by underwriters and companies not examined on an individual basis.
This year has been largely a different story, with credit insurers’ attitudes relaxing and appetites for insuring risk returning, with some quite keen competition when policies are renewed.
With the economic improvement and falling claims rates, credit insurers’ fortunes have picked up – COFACE’s insurance division recorded a €43m profit in the first 10 months of 2010 (2009: €287m loss).
But the government’s corporate spending review, the VAT increase and significant recent casualties in the construction trade will have dispelled any notion that it will be plain sailing from here on in. The failure of Connaught and Rok in particular have given rise to fears about a squeeze on credit limits.
Challenge ahead
Every credit insurer contacted by TTJ predicts a challenging 2011 for the timber/construction industry, with further companies expected to fail. The good news is that nobody is seeing a return to the panic which accompanied the financial collapse at the tail end of 2008/start of 2009.
“You usually get a ripple effect when you get a failure like that [Rok],” said Derek Barnett of broker Coastal Credit Insurance. “We have clients that lost out on Rok, Chandos Timber Engineering and Connaught. But there has been less of a ripple effect than we anticipated.
“We have seen a gradual relaxation in the market with covering companies in the timber sector. A number of underwriters are looking seriously at Ireland due to the economic situation there, but cover there had already been dramatically curtailed.
“The Connaught failure was interesting. A lot of sizeable builders merchants lost six- and seven-figure sums and a lot of sub-contractors lost out as well.”
Leading builders merchant chains are thought to have lost between £2-4m from Connaught’s demise. In all, Connaught’s unsecured creditors list stretched to 93 pages.
“We’ve not seen Rok’s unsecured creditors list yet but that will be a big document.”
Looking forward to 2011, Mr Barnett said the VAT increase to 20%, government cuts and the effect of deferred corporation tax will have an impact on companies’ financial viability.
“These changes are going to come into the equation and we would expect to see several companies falling over.”
Bob Lilley, managing director of underwriter Credit Indemnity Financial Services (CIFS), said 2010 has been better than expected, though he highlighted the failure of Connaught. “A number of companies got caught with it. There were some really heavy losses there. If you do’nt have credit insurance, how do you take knocks like that?”
Mr Lilley said CIFS was working with policyholders on a more regular basis, and was unlikely to cancel cover unless their situation was “absolutely diabolical”.
Cash management is key
“There will always be those companies that get through OK, those who need help and those that struggle and go under. Cash management is the key to it.
“Over the next year companies are going to need support from banks, financiers and credit insurers but I cannot see the wholescale withdrawal of cover we saw in 2008 and 2009.
“We will manage the risks as best as we can but people need to be a bit more open. It’s what your customer’s customer is doing that you need to know about.
“We have seen quite a few firms go down in the timber frame sector, but there has not been as much of an impact on sheet materials as there could have been.”
Companies in the wooden floors and kitchens market, he added, would come under pressure and he expected the furniture industry to suffer.
“Some companies will supply at cost to keep products moving. It’s just getting tighter and tighter and challenging for the construction sector. Going into the first quarter of 2011 we are going to see a number of firms go bust.
“The construction industry will not be leading the charge as much in 2011 as it has done this year. Consumer spending and the retail end of things will get much tighter next year. I think the banks have written off all the bad debt.
“Large companies are trying to tidy up their books and offload some of their significant debts. The support from the banks has been far from satisfactory.”
Return to normality
But he believes the market is on its way back to normal underwriting.
COFACE risk manager Chris Coppin said the Q2 2010 improvement in market conditions had brought with it an appetite for insuring risk.
“The credit insurance market had a lot of bad publicity in 2009. But a lot of buyers across all trade sectors are now more open with information.”
He reported more freedom with risk underwriting and competition for policies coming up for renewal.
COFACE said it based its decisions on tangible information, not hearsay, and looked at debt maturity, servicing availability of that debt and cash flow, scoring companies between 0-10.
“There has been a shift change in the scoring mechanisms, with buyers now more open. The information is more positive and a lot of accounts being filed are now showing the difficulties of the recessionary period, so the availability of up-to-date information helps with scoring and the availability of credit insurance.
“The market is still very delicately balanced,” added Mr Coppin. “The reduction in public spending will have an impact, but who knows when?
“2011 is expected to be a fairly challenging environment for the construction sector. There are concerns at sub-contractor level for 2011, because it is so fragmented and information availability is difficult.
“We can see a number of businesses in difficulty as there is a change from public to private sector work. It will be interesting to see what position some of the banks take in finance availability for some of those businesses.”
