A slew of major insurers have stopped issuing new insurance cover for suppliers of department stores Myer and David Jones over rising concerns of mass insolvencies in Australia’s retail sector.
The five largest providers of trade credit insurance in Australia have all begun to actively reduce their exposure to suppliers of the two retailers, viewing them as too risky to continue to insure.
Liam Berry, national manager of trade credit at multinational insurance brokerage giant Lockton said insurers were taking a pessimistic view of the department store sector.
“What we know is all major trade credit insurers are reviewing their current credit limits provided on David Jones and Myer, and have been actively seeking to reduce capacity for existing clients. No insurer appears willing to provide new cover on either group in the current climate.”
“This is in reaction to the current economic climate which has impacted discretionary retail particularly hard. David Jones and Myer have suffered significant drops in revenue causing underwriters concern as to the viability they can continue to operate in their current form.”
Trade credit insurance is typically taken out by suppliers who sell their product to larger buyers, such as retailers, and protects the supplier in cases where the buyer is unable to pay due to insolvency, defaults, or other risks.
Last week, $13 billion ASX-listed insurer QBE told its suppliers it would cancel all trade credit insurance cover for Myer and David Jones by July 16, saying it had concerns over the viability of the two department stores.
There are four other major insurers in Australia which provide trade credit insurance: Atradius, The Bond and Credit Co, Coface and Euler Hermes, which is owned by Allianz. Collectively, the five process millions in Australian insurance claims each year.
Some insurers are refusing to extend new cover to suppliers, where others are reducing suppliers’ limits, brokers say. Reduced limits may also be due to suppliers selling less to retailers due to the currently depressed retail environment.
A Myer spokesman said it had continued to pay suppliers and had worked with them constructively through the COVID-19 crisis and would continue to, “with or without trade credit insurance”.
A David Jones spokesperson said it had also continued to pay suppliers and was in a good financial position with strong cash balances. The company has not yet drawn upon a $100 million loan offered by its parent company at the beginning of the pandemic.
“We are working closely with trade credit insurers so that they can gain a direct understanding of our position rather than taking a broad sectorial view,” the spokesperson said.
David Jones has appointed investment bank UBS to undertake an accelerated review of its store network and seek buyers for its $1 billion in property assets following a 35.8 per cent plunge in sales through March and April.
Myer has not yet revealed to investors the impact of COVID-19 on its revenue, however, the company has applied for the government’s JobKeeper subsidy, implying sales are at least 50 per cent down.
Dan Chapman, director of credit solutions at $45 billion insurance multinational Aon said insurers’ outlook of the whole retail sector, not just David Jones and Myer, had “deteriorated”.
“It’s fair to say insurers are very cautious writing new cover and are reviewing their existing exposures in that sector as there is likely to be a flood of insolvencies later in the year,” he said.
Mr Chapman pointed out moves by insurers to reduce cover or lessen liabilities could exacerbate any issues at struggling retailers as it would likely prompt more suppliers to demand payment up-front, reducing companies’ liquidity and stymieing their cash flow.
“Trade credit insurance provides the certainty of payment which enables suppliers to sell on credit,” he said.
“When the cover isn’t available the risk falls back on the suppliers and many will require payment on delivery. This can have a huge impact on the liquidity of the buyer and make their financial position even worse.”
In a statement, an Allianz spokesperson said it was continuing to support the department store sector and was not currently reviewing its credit limits nor reducing capacity for existing clients in relation to Myer and David Jones. However, the company would not confirm if it had ceased extending new cover to suppliers of the two retailers.
“Standard practise at Euler Hermes is that all requests for trade credit cover are assessed individually based on a range of factors such as the creditor(s) involved and the amount of cover sought,” the spokesperson said.
Both Tokio Marine, which owns the Bond and Credit Co, and Coface refused to comment. Atradius did not respond to requests for comment.
This article was originally published on the Sydney Morning Herald here.