Both Currys (Dixons Stores Group) and Comet (Kesa Electricals) have been hit with bad news about their credit insurance in the past few days but these are only the headline grabbing names that are affected by this trend.
Much debt to companies, especially for large amounts, are insured against risk by the supplier so that, in the event that the company purchasing goods goes bust, the supplier still gets paid. However with the current financial climate insurers that traditionally supply this sort of cover against bad debts are either reducing the cover on offer or refusing cover altogether.
A Comet spokeswoman said: “We have not been informed of any change in the facilities that credit insurers provide to our suppliers. Our cash position remains strong.”
Woolworths and some of Icelandic investor Baugur’s chains are among those other retailers whose suppliers have been affected.
Shares in the owner of PC World and Currys have been slammed after an insurer scaled back its cover against the firm being unable to pay its suppliers.
Consumer electronics retailer DSG International was dealt the blow by the world’s second largest trade credit insurer, Atradius.
News of the insurer’s move to reduce its exposure to potential losses as part of a wider review of the retail sector sent shares in DSG tumbling as much as 20%.
Other high street retailers such as JJB Sports and Woolworths, as mentioned, have been hit by a similar tightening from other insurers as the retail climate darkens.
An Atradius spokeswoman refused to comment on specific cases, but said: “Every trade credit insurer is looking at the non-essential end of the consumer goods market because consumers are cutting back on spending.”
A DSG spokesman said: “While it is true that Atradius has reduced but not withdrawn cover across the entire retail sector, it is not a DSG specific issue – it is more about Atradius and how it manages its business.
“Our suppliers still have access to credit insurance, they continue to supply us and there have been no changes to our terms for suppliers.”
But a trading update from DSG last month highlighted the harsh conditions faced by the firm in the UK, following a 7% drop in like-for-like sales for the six months to October 18. The figure included a 7% drop for the company’s UK and Ireland electricals business and a 11% fall for PC World.
This week the pressure on the sector increased after US consumer electronics giant Circuit City, another company whose trade credit insurance was withdrawn, filed for bankruptcy protection in the US.
This phenomena is fueled further by the high level of bad debt particularly in the building and developer markets but, as people stop moving home big ticket items such as new kitchens are also adversely affected. Basically, people stop buying new kitchens and appliances or new homes.
Current anecdotal reports, although many unconfirmed, suggest that millions of pounds is being lost to bad debt from these sectors, much of which seems uninsured losses.
One appliance brand MD reported that their customers were going bust at the rate of two per week in the kitchen sales sector.
The trend in reduction or removal of credit insurance can further exacerbate the problem by not allowing companies the freedom to trade through the problems and forcing them into bankruptcy as they try to find liquidity to trade. This places more pressure on company’s cashflows as credit is tightened or removed altogether.