The crisis surrounding UK construction company Carillion may not have been pandemic related, but it’s still a textbook example of the domino effect in action.
Carillion, the UK’s largest ever company insolvency
When Carillion went bust in January 2018, leaving liabilities of almost £7 billion, it was described by the UK’s Official Receiver as the country’s ‘largest ever trading liquidation’.
The corporate insolvency triggered a powerful domino effect through Carillion’s trading network of 30,000 subcontractors and suppliers, with many pushed into it.
Just months later, in October 2018, a report from accountant Moore Stephens said there was a 20% spike in the number of UK building sector firms becoming insolvent following Carillion’s liquidation.
While state intervention delayed any such Covid-19-triggered insolvency domino effect during 2020, we still saw isolated examples of large-scale insolvencies caused by lockdown.
These examples include Avianca, one of Latin America’s biggest airlines, which filed for it in May 2020. While the Colombian airline’s suppliers were left with unpaid invoices, the insolvency also had a devastating transversal impact on footfall at travel hubs causing retailers and service providers to go bust.
Covid-sensitive sectors under increasing corporate insolvency risk
Another example is CBL Properties, a large US mall owner, which filed for Chapter 11 bankruptcy protection in November 2020. It took this step to clear $1.5 billion from its balance sheet following the insolvency of a string of key mall tenants.
The non-food retail sector in general, which had already lost momentum in the last decade, has been further severely weakened by the pandemic, with the fashion and apparel segment hit particularly hard.
Large-scale retailers pushed into insolvency during lockdown include the Arcadia Group, which owned a large portfolio of British clothing stores including Topshop/Topman, Burton, Dorothy Perkins and Evans. Arcadia Group’s demise led UK department stores Debenhams as well as Edinburgh Wollen Mill to move from administration to liquidation. These undoubtedly caused fractures within their respective supply chains.
It is important to remind that the insolvency freeze and moratorium legislation voted during the first quarter of 2020 in several countries such as Germany, France, the UK, Japan, India, Singapore or Australia have made it significantly easier for struggling businesses – so-called zombie companies – to continue trading even though they may be technically insolvent. Even if those assistance mechanisms are justified in the very short-term, the longer the natural process of bankruptcies is prevented, the higher the distortions of the competition and the higher the damages for the economy over the medium-term.
Reducing supply chain risk during the calm before the storm
Thanks to unprecedented liquidity in the global markets, businesses now find themselves in a unique position. Indeed, C-suites have a golden opportunity to anticipate and reduce their supply chain risk prior to the withdrawal of state support, which still depends on pandemic uncertainty.
Achieving the required level of insight in-house may not be possible for many companies. But with solutions such as trade credit insurance in place, businesses can be confident they are protected against customer and supplier insolvency risk beyond their control.
Trade credit insurance compensates your company in the event of late or unpaid invoices, but more importantly, it helps you avoid bad debt in the first place. Trade credit insurers such as Allianz Trade invest significant time and resources in carefully mapping the global trade credit landscape, grading businesses’ risk levels and advising their clients on the safest way to do business.
The other benefits of trade credit insurance can include:
- · Improved customer relationships, thanks to financial guarantees and increased confidence
- · More competitive trading conditions, thanks to more secured payments
- · Effective and efficient worldwide debt collection and therefore a good night's sleep knowing that your risks are insured and your payments guaranteed.
- · Improved payment behaviour, because customers pay an average of five days faster if they know you have credit insurance, which improves your liquidity.
Marine Bochot says: “In the current economic climate, a well-run trade credit insurer does whatever it takes to understand the levels of risk in their client’s supply chains. It’s often said that ‘know your customer’ is an essential business mantra, and this remains true in 2021. The more granular your insight into your customer’s ability to trade and pay, the better you can anticipate a potential domino effect.”
In the second article from our three-part of Covid-19 insolvency domino effect series, we examine how to identify corporate risk, while our final article provides actionable insights on how to protect your supply chain so it remains resilient against the domino effect. This includes pivoting towards digitally transformed trading partners, ensuring supply contracts provide insolvency protection and fully diversifying both your customers and supplier baskets.CTA: You might be interested in… + link to the other articles (with specific tag)OR Interested in protecting your business against insolvency risk? Contact our local teams.