Insights

Companies Turn to Trade Credit Insurance to Hedge Against Customer Default Uncertainty


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Trade payment delays have deteriorated, reaching the highest level in a decade. With so many customers paying slower, customer payment experience becomes less effective in identifying higher risk clients and as a tool to determine whether to extend credit and to what level. A recent informal NFP survey showed that only 10% of companies surveyed obtain financial statements on their top 20 customers and less than 25% obtain bank reports as a routine credit check to determine customer liquidity.

Many entities, whether they have been impacted by a temporary shut down or continue to operate well under full capacity, have incurred losses that have led to lower equity and in turn higher leverage and weakened liquidity. The over $11 trillion liquidity injection and government aid in 2020 paired with the extremely low interest environment has made it possible for many weaker companies to avoid default despite the negative impact of COVID-19 on their cash flow and balance sheet. These companies are destined to become “zombies,” or companies that do not generate enough operating income to cover annual debt costs for an extended period.

We have seen high-profile insolvencies from those impacted most in the retail and entertainment segments, with insolvencies of leaders like JC Penney, Neiman Marcus, J Crew and Cirque du Soleil. We are now seeing the insolvencies become more widespread with small engine manufacturer Briggs & Stratton ($1.4 billion in liabilities) and energy company Chesapeake Energy Corp. ($11.7 billion in liabilities) filing for protection. Other industries will follow as the “zombie” companies deteriorate toward default.

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