Construction finance directors are key in credit insurance crisis

Finance directors in construction companies must play a bigger role in ensuring credit insurance providers keep their cover in place, says Adrian Doble, head of restructuring services at Vantis, the accountancy group.

Over the past year there has been a £10bn drop in the level of credit insurance offered to construction companies – down by 40% from £25bn to £15bn.

Doble feels they are being painted too harshly. “Trade insurance companies are often misunderstood,” he says.

“The big three prime insurers – Cofas, Atradius and Euler Hermes – will all back construction businesses with well-presented plans and good prospects. The trick is getting access to the decision makers.

“Construction accounted for 45% of all credit insurance written last year. The sector had been booming and so had the level of cover so now, on the downside, it will be more noticeable that the volume of cover is withdrawing.

“It’s a reflection on the way the sector is – some other market sectors have no need for credit insurance at all.

“Let’s take a concrete subcontractor as an example,” said Doble “and he’s just found that the main contractor he works for has lost its credit insurance cover. That should send him the message that someone has passed a verdict that ‘the main contractor is no longer a reasonable credit risk’.

“He needs to know why because the person who made that decision will have had access to all the main contractor’s defaults and will have asked the company for up-to-date management information – either found that information was not forthcoming or what was made available made them uncomfortable.”

Doble reckons that it is the main contractor who has the main problem when no-one will give credit insurance cover on them as:

• Subcontractors and material suppliers will demand to be paid up-front
• The main contractor will be offered shorter credit terms

“The main contractor has to go to his trade insurer and talk to them when this happens,” said Doble.

The outcome could be that the insurer takes a security and cover stays in place…or at the other extreme he says ‘sorry you are not insurable’.

Two changes that Doble would like to see are:

• Credit insurers reaching out to the industry to offer solutions before problems occur
• Finance directors in construction groups keeping a keener eye on their credit insurer

If the finance director has hidden a problem with a credit insurer there is no way it will reach the attention of the chief executive until it is too late.

“It could be that the firm gets into trouble, say, and a letter is sent from the credit insurer to the finance director,” says Doble. “The letter is all too easily ignored and when that is so then six weeks later the firm finds that it has no cover. Recovery professionals can bridge that gap before it gets too wide and does harm.”