Credit insurance drought raises risk of more high-street closures

0 Comments | Sunday Herald, The, Apr 5, 2009 | by STEVEN VASS

FEARS of a further wave of high-street failures are rising as the UK government struggles to compensate for the drying up of credit insurance to suppliers of vulnerable retailers.

In February, Lord Mandelson's Department of Business and Regulatory Reform (BERR) promised to "nd a way to shore up faltering con"dence by compensating for the withdrawal of insurers by the following month.

However the Sunday Herald has learned that policymakers have found the issue more complex than anticipated.

Retail credit insurance is the cover provided to manufacturers, wholesalers and distributors who supply retail outlets, against the risk that the shops will go bust before the goods can be paid for. Leading names in the sector include Euler Hermes, Atradius and Coface.

It has emerged that suppliers to household electronics specialists Currys and PC World are being refused cover by some insurers unless the shops' due payment dates are brought forward.

The demands for faster payment are exacerbating the poor sales- related woes of owner DSG.

Suppliers to well known names, including Jessops, are being refused insurance. Others, including suppliers to Toys R Us and Debenhams, are said to have had more stringent terms imposed (although some insurers may still rate them at the top level of creditworthiness).

Retailers have been pushing the government to take the place of insurers by underwriting their suppliers' contracts, in a similar deal to the asset protection scheme used for insuring "bad" bank debts.

But with proliferating pressures for industry bail-outs, manufacturers and distributors find it harder to get cover for the credit that they traditionally extend to retailers. This means they have to choose between bearing the risks themselves or not supplying outlets at all.

Having seen how easily the apparently solvent music and entertainment giant Zavvi could be pulled down by the collapse of Woolworths before Christmas, the government is said to be wary of exposing taxpayers to further liabilities by assuming the risk itself.

"This is a very difficult nut to crack, " said a source familiar with the problem. "The government is having to look at how much risk it wants to take on. It was more complicated than they thought."

While the source believed that a solution would ultimately be found, the uncertainty is unnerving suppliers and their retail customers. "I've stopped supplying the big retailers altogether, " said one Scottish-based distributor.

"I've pulled my neck in and I'm focusing on only supplying people I absolutely trust. I got stung badly by Woolworths, and I'd rather live with lower sales than take unecessary risks.

"One of my advisors said, 'You can either go for one million pounds turnover and be safe or go for six million and take on the risk.' I decided to take the lower turnover."

Nigel Ellis, director of the Electrical Distributors' Association, said: "Everyone has to be so much more careful about their exposure to bad debt."

Retailers are battling to keep control of cashcow, with those such as DSG said to be refusing to give ground on credit terms to give their suppliers a straight choice between bearing the risk themselves or not supplying them.

Big retailers can bank on the fact that they are effectively too important for their suppliers to pull the plug.

A spokesman for DSG said: "This is not a DSG-specific issue. As market leaders we are an important route to consumers for our suppliers' products and we have seen no change in our overall terms with our suppliers."

A spokeswoman for BERR said: "It's important that we carry out a full analysis to ensure we deliver the type of help "rms need whilst offering value for the taxpayer.

"We are working in partnership with the credit insurance industry to find a collaborative way to alleviate the pressure being felt on supply chains throughout the UK.