to a massive injection of state-funded liquidity into global markets,
many companies haven’t had to deal as much as usual with late payments
and insolvencies recently. But as our article Insolvency risk: understanding the Covid-19 domino effect points out, this situation won't last.
With governments expected to begin phasing out state support this year, the
challenge now facing CEOs and CFOs is how to spot high-risk customers
and suppliers to protect their company against insolvencies.
The differences between customer and supplier insolvency risk
The risks associated with customer insolvency are clear-cut: without adequate protection, not only do you face potentially devastating financial loss if you sell on credit terms but there is also the potential for protracted (and costly) legal proceedings. Meanwhile, the risks related to supplier insolvency may seem less direct, but they can be just as negative – ranging from lost down payments and deposits to interrupted production and service delivery, which can also lead to business insolvency.
Identifying insolvency risks in a supply chain is critical, but what exactly do high-risk, Covid-sensitive customer and supplier companies look like and are they easy to spot?
Our tips for identifying Covid-sensitive customers
According to Marine Bochot, Head of Group Credit Underwriting at Allianz Trade, identifying Covid-sensitive customers can be complex as it often involves piecing together a jigsaw of factors, which combine to heighten the risk of business insolvency.
Marine explains that one of the key factors that increases insolvency domino effect risk is the sector in which a customer operates.
“For example, businesses in the hospitality, non-food retail, air industry and automotive sectors now represent a higher risk of insolvency,” she says. “That’s because borders have been closed, traffic has been minimal, mobility has been stopped, people haven’t been able to meet or move, and they either haven’t been able to consume or they consume differently – for example online.”
“In fact, many businesses in sectors that rely on physical exchange and social interactions for goods and services have been hit first by the Covid crisis. So they have experienced more intensely the need to quickly adapt their operational models and cost structure. Companies that lack this agility are more exposed to business insolvency and a potential domino effect in the supply chain.”
The passenger airline industry is a prime example of this. The airlines with the agility and flexibility to convert or reinforce part of their traffic from passenger to cargo have performed much better during the pandemic.