01 Feb More Trouble Ahead?
The scale of the Carillion default is starting to emerge. Estimated at between £750m to £1.5bn Carillion’s debt default will have a significant knock-on effect. Only £31m is expected to be paid in claims the insured would have had to cover at least 10% of the debt value meaning around £35m that was covered. It was widely reported that insurers had been pulling cover in the weeks leading up to the insolvency announcement. Underwriters are not in the habit of taking on unwelcome risk and had doubtless been scaling back risk for some time. However given it was a matter of days, weeks at best, that the firm was declared insolvent after limits were pulled that would not give much time to reduce exposure.
At best 5% of the outstanding debt was protected. This seems pitifully small and that protection was doubtless largely held by the bigger corporates. Yet again it will be SMEs who bear the brunt of the cost. The banks are offering support packages and rightly so but ultimately it will need to be paid for. It is about time that SMEs have access to the same credit protection tools as the banks and larger corporates.
Now we are seeing more red flags elsewhere with Laing O’Rourke filing accounts late (never a good sign). The warnings are not restricted to construction either, problems at Capita are being reported and many of the large retailers are showing signs of strain. Maplins, Harvey Nichols, New Look and Poundland these are household names and spread across the sector from high-end to budget retailers.
In 2017 around 24k companies went into liquidation owing a reported £3.3bn, yet many trade creditors do not even attempt to claim as they are painfully aware how little they will recover. The options for smaller businesses are usually limited to self-insure (set cash aside for write-offs) or purchase expensive policies that only really make sense for larger businesses. Insuring against the sudden shocks or large debtor concentrations and taking action when conditions change is the only way smaller businesses can truly protect themselves.