COVID-19 continues to weigh on global economies, and many businesses are struggling to keep afloat. Maintaining liquidity is one of the main challenges businesses may run into, as they try to wait it out until economic activity picks up.
According to Nick Robson (pictured), global head of credit specialties at Marsh, the pandemic has “significantly” affected the liquidity and solvency of businesses. This is strongly reflected in rating agency credit ratings, where speculative grade default ratings are expected to more than double from the long term average over the course of the next year. As a result, credit insurers are expecting a 20% to 30% increase in insolvencies in the next 12 months.
However, Robson said that in the short term, the liquidity impact has been moderated by a combination of several factors:
- Good will – there has been an unprecedented level of understanding among corporations, lenders, and insurers with regard to late and rescheduled payment obligations;
- Government relief measures that have alleviated some of the issues with payroll, etc;
- An expectation that recovery may be rapid when it comes, although confidence in this expectation is reducing with the extended lockdown and the resurgence of COVID-19 in states like Texas, Florida, and California; and
- An expectation that government recovery stimulus plans will help support future growth.
The worst is not yet over, at least economically, as losses are expected to rise significantly during the third and fourth quarters and into 2021.
“As a result, trade credit insurers are reviewing their credit limits and reducing their exposure in the higher risk sectors and companies,” Robson said. “We expect insurers to need to apply significant rate increases because of the significant change in the credit risk environment, but we are working with our clients to differentiate their risks and, wherever possible, minimize impact.”
In order to help businesses recover from the economic downturn, Robson stressed the importance of credit insurance in dealing with unforeseen circumstances.
“Credit insurance enables growth and secures capital. This is the core value we aim to deliver to clients and is especially important as we look to recover from this crisis,” he said.”
“A credit insurance policy directly protects liquidity and cash flow. It supports continued trade with existing customers and provides confidence and security to grow with new customers, which will be especially important as we recover from the crisis and supply chains undoubtedly evolve. Credit insurance is also a key form of security for receivable finance and, in this area, the growth opportunity is very significant for companies, credit insurers, and lenders – both bank and non-bank. Risk managers will need to align closely with their CFO/treasurer to successfully deploy these solutions.”
In order to make the most of credit insurance, Robson advised businesses to exercise strong credit management discipline.
“The most important measure is to operate with strong credit management discipline, using both external data and, most importantly, internal data on customer payment behaviour and history to track and diligently manage and collect payments, so that problems are quickly identified and measures taken to resolve before defaults occur,” he said. “Credit insurance supports and supplements this activity but does not replace it.”
Furthermore, he noted that engaging with digital finance platforms is becoming increasingly attractive to corporate clients, as it facilities a more efficient financing process and can support credit risk management.