By Natalie Harrison
LONDON (Reuters) - Credit insurers are looking closer than ever at bank support when covering company risk, and some credit experts see them as indicators of when businesses will likely land in financial trouble.
Credit insurers cover the risk that a company is unable to pay its suppliers. When they pull out, suppliers are likely to demand cash on delivery, creating an extra liquidity need that can make life harder for companies already struggling.
"It's all about the risk of insolvency, that is the risk we cover and the main feature at the moment," said Fabrice Desnos, chief executive of Euler Hermes UK
"In the current credit environment, the perception of bank support for a particular company is key for our decisions, and more so than it used to be," he said.
British retailer Woolworths
U.S. equity firm Blackstone
"Supplier insurance is important because the continuation of that insurance provides stability to a company's short-term cash flow forecasts," said Simon Davies, a managing director in Blackstone's corporate advisory unit.
The European credit insurance industry -- dominated by Atradius
NO RETAIL COVER
Atradius cut back its provision of credit insurance for companies that supply the retail sector in November, including some suppliers to struggling British electrical goods retailer DSG International
"As an industry, we're seeing a massive increase in the number of claims and overdue debts reported to us," said Ian Hollyhomes, a London-based director at Coface.
"We need to be able to identify companies that are likely to fail or have a greater default probability in the short term."
When a policy is canceled, or the amount on sales covered reduced, suppliers that had allowed periods of 45 or 60 days to receive payment may fear a company could run out of cash.
"Forty-five days of payables for quite a lot of businesses could be the difference between having some money and none," said Blackstone's Davies.
Credit insurers say their work helps to limit the number of insolvencies among their own clients who are vulnerable to larger businesses that may fail to make payments.
They use their own financial analysis, confidential information about banking relationships, as well as prices in credit derivative markets to help their decision making.
A potential breach of covenants is likely to be seen very negatively, said Desnos, though he that this event alone is not enough to trigger a cancellation.
It also closely watches those companies that trade upfront in the credit derivatives market -- meaning that sellers of protection against default deem the risk so high that they demand a big downpayment.
Europe's main derivatives indexes list 22 companies trading upfront, including German car parts maker ATU
"These are all names of large companies, which will be familiar to many and in very different sectors," Desnos said.
"This highlights that risks are increasing everywhere."
(Reporting by Natalie Harrison; Editing by Andrew Macdonald)
