Carillion: Second wave of insolvencies will cause “considerable challenges” for underwriters

The industry must beware the domino effect of Carillion’s failure, Credit Risk Solution’s Mike Clark, who is also chair of Biba’s Trade Risk Focus Group, has warned, as trade credit insurers predict another wave of insolvencies. 

Acumen Credit Insurance associate director Simon Martin has also warned of a domino effect.

“Predicting the extent and size of these secondary failures presents considerable challenges for underwriters,” Clark warned. “And analysis historic balance sheet information has limited relevance in circumstances where, post-Carillion, the construction landscape has changed.”

Suppliers are now feeling “very bruised”, Clark advised.

Carillion worked with 30,000 contractors, many of them small enterprises that were heavily reliant on steady cash flow from major projects that tended to have government-backing.

The £31m the ABI expects will be paid out by trade credit insurers, following the construction giant’s liquidation, is only expected to cover a fraction of the total losses incurred. This will lead to a period of “considerable uncertainty”, according to Clark.

However, Clark did note that there are some positives, with the prognosis “not as doom-laden” as first expected by some.

Other major contractors had entered into joint ventures with Carillion, potentially preventing losses. However, Clark cautioned, “some are inevitably stronger than others”.

The Biba Trade Risk Focus Group chair explained: “Once again, the value of credit insurance has been clearly demonstrated. Those companies who invested in cover had access to industry specialists who offered guidance on the credit risks involved in selling goods and services to Carillion. Significant claims will be paid but many suppliers took heed and managed exposures accordingly.”