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Soaring bad debts suggest it's time to say 'no'

Tom Rolfe

Credit insurance claims in the construction sector are at an all-time high.

For one leading insurer construction claims are currently 180 per cent higher this year than at the same point of 2017, and it’s likely those numbers are similar for other insurers.

Carillion’s creditors alone reportedly received £31m in credit insurance payment claims. But if anecdotal evidence we have seen is correct, the true figure is three to four times greater.

Add to this a steady stream of high-profile insolvencies throughout the year, and it is easy to estimate a total trade credit insurance payout for 2018 of well above £150m.

Not getting any better

Unfortunately, there are plenty of signs that 2019 will be at least as tough a year as 2018. Growth forecasts for the sector have recently been downgraded from 2.3 per cent next year to 0.6 per cent. This is reinforced by the construction purchasing managers index, which has suggested that activity has weakened in recent months

Major contractors have made clear that they are looking to cut costs and pay down debts – most notably in the cases of Kier and Interserve. These moves may be branded with positive slogans such as ‘fit for growth’, but the subtext is that these firms are bracing themselves for more challenging times.

Such firms may have the ability to survive whatever the next year may bring and turn things around in the medium to long term, but the risk of bad debts in the sector looks like it will remain high for the next 12-24 months at least.

“Doing things the same way as before is likely to result in twice the level of bad debts”

I had an interesting conversation with a senior credit risk specialist for a major materials supplier recently. His short-term view of the sector is that there is greater credit risk involved, an inevitable increase in the number of insolvencies and a similar rise in bad debts.

He spoke about the level of bad debt that was anticipated and budgeted for and how, despite extremely sophisticated modelling and forecasting tools, many of the bad debts arising at the moment were not from companies identified as ‘high risk’, but were coming out of the blue from companies who appeared relatively stable but were falling towards insolvency.

Premiums poised to rocket

His conclusion was that rising risks were unavoidable, and that better understanding of them was crucial.

This is future the market has to get to grips with. If the likelihood is that insolvencies and claims will run at double the usual level, then it is logical that premiums have to increase. 

Moreover, doing things the same way as before is likely to result in twice the level of bad debts. As a benchmark, bad debts in construction are running at around 1 per cent of total turnover, so a start point for any company in terms of bad debt provision is 1 per cent of turnover. 

Whether credit-insured or not, all companies should review their credit risk management processes and be prepared to say ‘no’ to high-risk companies.

Tom Rolfe is a construction credit insurance specialist at The Channel Partnership

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