Credit Insurance: Risky business

The recession has forced the issue of clients' credit insurance into the spotlight. Media Week finds out how the issue has arisen, what it means for media agencies and how the situation can be eased.

What is credit insurance?
A form of third-party protection for suppliers, in this case media agencies. Credit insurance ensures that if a company an agency is trading with goes into administration, the supplier is not left saddled with unpaid bills. The system is crucial for media agencies, which commit to bookings on their clients' behalf months ahead of the billings process.

Credit insurance is designed to protect an agency's cashflow, providing regular credit assessments and issuing early warnings if a client is heading into financial difficulty. Should a company fall into administration, credit insurers claim to provide as much as 90% of the outstanding debt immediately.

How has the credit crunch created the crisis?
By drying up access to credit, slowing cashflow and making businesses much more vulnerable in a downturn. As a result, many credit insurers are scaling back - even withdrawing - cover for those companies they deem to carry credit risks. Brands that have already seen their credit insurance fall include Peacocks, Focus DIY, Gala Coral and DSG International, owner of Currys and PC World.

Increasingly, this has happened with little notice, cutting the buying power of clients and forcing media agencies to absorb financial risk. Many are responding by requesting up-front payment on all bookings, renegotiating contracts to shorten payment terms or - in an increasing number of cases - resigning the account.

However, many believe the problem has been exacerbated by credit insurers. The marketing director of one retailer says: "Credit insurers have taken on the mantle of protecting suppliers. In reality, they have only succeeded in destabilising those businesses, while threatening the livelihood of companies that are supplied to."

How will this affect the way agencies do business?
The withdrawal of credit insurance has been interpreted as a sign of clients in distress and agencies are adopting different approaches to the problem. Some are simply keeping faith in their current relationships. For example, Mediaedge:cia Manchester is continuing to work with Focus DIY, which had its credit insurance withdrawn, through its own terms with the retailer.

Bill Grimsey, chief executive of Focus DIY, explains: "My suppliers and media companies are treated like my bankers and have access to my accounts, senior management and stakeholder information. Hopefully, this transparency and collective approach between us and our suppliers will negate the need for credit insurers, most of which have abdicated from UK plc at this crucial time."

Tony Fenton, group financial director at ZenithOptimedia, says: "Agencies are involving finance directors far more closely in their decisions to take on new business. Our role used to be a simple case of reviewing a client's credit limits before giving the contract the green light to proceed.

"Now, finance directors are far more closely tied to the client's finances and access to credit, regardless of whether they have credit insurance or not."

For agencies that decide to service business without insurance - believed to have been at the heart of McCann Erickson's decision to take on the beleaguered MFI and The7Stars' decision to absorb Zavvi - the toss-up will be between servicing a high-profile account and holding the bills on booked media should the business fall into administration.

What has been the fallout so far?
Trading conditions have made credit insurance a serious problem for most businesses and their suppliers. A survey by consultants Kreab Gavin Anderson suggested 62% of the businesses polled reported their suppliers had experienced problems with credit insurance.

The issue is believed to have been instrumental in Woolworths' dramatic collapse. Unable to secure credit insurance, its suppliers responded by insisting on upfront cash payments. Forced to draw upon its borrowing reserves, the high-street retailer ran up debts beyond what its bankers were prepared to lend. By December, the store had gone into administration after being forced to liquidate everything to repay those debts.

Another high-profile case is the £24m MFI account, which moved into McCann Erickson Birmingham last May after M&C Saatchi and ZenithOptimedia raised concerns over its inability to secure credit insurance. Come December, the company had gone into administration, leaving McCann Erickson holding £900,000 of pre-booked media bills (see box, page 24).

Meanwhile, last August, Zavvi moved its £6m planning and buying account out of Manning Gottlieb OMD and into The7Stars. Within months, it transpired that Zavvi was having difficulties securing full-scale credit insurance and, by Christmas Eve, the entertainment retailer had gone into administration.

"Once viewed as an indicator of an agency's success, credit insurance has forever changed the way account wins will be viewed in the future," says the chief executive of one media agency.

What is being done?
In January, the Government launched the Working Capital Scheme for companies with a turnover of up to £500m, giving them access to credit through loans. A similar measure for credit insurance, where the Government splits up to 50% of risk with the insurer, is still under review.

The Institute of Practitioners in Advertising has also provided recommendations for state-funded top-ups for firms that have their credit insurance withdrawn, as well as longer termination periods.

Alex Hunter, finance director at the IPA, says: "Television bookings have a payment lag time of at least eight weeks, whereas credit insurance can be withdrawn within a week. A proper termination clause with adequate notice periods would allow media agencies to manage the process much more smoothly with their clients."

What are the insurance providers saying about the problem?
Put simply, not enough. Of the three major credit insurers - Euler Hermes, Atradeus and Coface - only Atradeus was willing to speak to Media Week. The firm said it recognises the pressure on media agencies and clients, but reiterated that its role is to act in the interests of the transactions of its suppliers and to issue early warnings.

Spokesman Jo Aaron says: "We exist to manage credit risk for suppliers, not to provide working capital. It is the advertiser's responsibility to show us their business model, up-to-date financial reports and access to income."

Atradeus conceded its notice periods before Christmas had not been long enough, but attributed this to the speed at which the global crisis flared, catching much of the market off guard.

Can agencies protect themselves?
Yes. The safest way is to insist on pre-payment in advance of all media bookings. Other options include reducing payment times from 30 days and issuing weekly invoices for advertising as it appears.

However, clients are unlikely to view pre-payment favourably as it ties up vast amounts of cash, hinders cashflow and can be seen as an indictment of trust. Alex Altman, deputy managing director of Mediaedge:cia, says agencies should approach the issue "dispassionately" so it is seen as a "universal and neutral response to economic conditions, rather than a reflection of the client's business".

Alternatively, agencies could try negotiating with media owners so that, if a non-insured client runs into difficulties, media space can be transferred to another client. This strategy is understood to be how McCann Erickson Birmingham salvaged some of the booked media space for MFI after it went into administration.

Finally, agencies should get close to a client's business.
Dean Lovett, chief executive of McCann Erickson Birmingham, says: "It's about careful due diligence. Clients should know where the pressure points on their cashflow are - such as Inland Revenue, rents, VAT payments and salaries."

Atradius' Jo Aaron adds: "Look for changes in your buyers' credit patterns. Changes of staff, patterns of business or payment terms should instantly ring alarm bells."

How have other agencies coped?
The sensitivity of the issue means many agencies are reluctant to comment on the record. However, unattributable responses varied. Some agencies had reduced their buying services in line with the cover that had been withdrawn - one media agency said its clients' buying budget had shrunk from £10m to £2.5m.

Others are simply servicing their account without credit insurance and shouldering the risk. "The withdrawal of credit insurance is not always the sign of a company about to go to the wall," says the chief executive of one media agency.

"Instead, it is reflective of the mindset of insurance providers, who are doing all they can to pull out of this market altogether. Media agencies should be savvy enough to see this and not destroy long-term relationships based on an independent audit of a provider that is acting in its own interests."

How long will it take before insurers supply full cover?
Difficult to say. The problem is tied to the state of the economy and, until it picks up, insurers are unlikely to want to cover vast amounts of real risk, particularly as many have problems of their own.

Euler Hermes, the largest credit insurer, has suffered from the sudden change in the economic climate. The company made a net loss of EUR68m in the final quarter of 2008.

The Government is still keen to ensure that healthy businesses have access to credit and a state-funded split of credit insurance could improve the situation. But, for at least the next six months, agencies will need to assess the businesses they are working with and make their own decisions.

By Nigel Stanford, partner in the corporates group at solicitors Cripps Harries Hall

Request pre-payment
Pre-payment would involve the advertiser paying in advance for the cost of the advertising it wants the agency to book. Unfortunately, many advertisers are strongly resistant to making pre-payments as they can tie up large amounts of cash for potentially substantial periods.

Request a bank guarantee
Agencies could request a guarantee of the advertiser's liability, for example the advertiser's bank or any parent company of the advertiser. However, a bank guarantee may be resisted by an advertiser, given its expense. And, from an agency's perspective, a parent company guarantee of the advertiser's liability may not be acceptable, particularly if the credit insurer is casting doubts on the financial health of the advertiser's whole group.

Improve payment terms
Agencies could change their model from monthly invoices on 30 or more days credit terms to invoicing on a weekly basis for advertising that had appeared that week and required payment more quickly than 30 days.

Change terms with media owners
Agencies could attempt to change their terms with a media owner so they have a greater ability to cancel bookings without a cancellation charge being applied. If an agency is able to cancel without penalty all bookings for advertising that had not appeared right up to the day before insertion/broadcast, this would enable it to substantially mitigate its credit risk. However, such a measure is likely to be strongly resisted by media owners.

Share risk with the clients
Agencies could consider sharing the risk of the uninsured exposure with the client. For example, if the client's credit insurance limit was reduced to say, £500,000, while the agency's exposure to that client remained at £1m, the uninsured £500,000 could be shared between the client and the agency. The client would pre-pay £250,000 to the agency, so the uninsured exposure was reduced to £250,000. In return, the agency would continue to allow the client normal credit terms, not cancel bookings already made, and agree to shoulder £250,000 of the credit risk.

High-risk advertisers - Media buyers beware


Agency: MediaCom (NatWest)
Spend: £15.8m(i)
Last month, RBS announced the biggest corporate loss in history, with its share price dropping from more than £5 in 2007 to 21p by mid-February. However, there is a silver lining: the bank has unveiled plans to reduce its balance sheet by up to a quarter in the next five years, with plans to sell assets valued at £250bn to £300bn.

Agencies: Several
Spend: £69m
The UK arm of Icelandic investment firm Baugur collapsed into administration last month. Icelandic bank Landsbanki took control of BG Holding, which owns stakes in House of Fraser, Iceland and Hamleys. Atradius' Jo Aaron says: "Baugur still has plenty of shares on the British high street, such as the Mosaic Group and House of Fraser. We maintained cover on those because Baugur going under doesn't affect the turnover of individual businesses."


Agency: MediaVest Manchester
Spend: £548,000
Euler Hermes reduced its cover on Topps Tiles last month and the company's share price dropped 21% following the news. However, a spokesman for Topps Tiles told Media Week the company continues to generate positive cashflow. The firm is expected to continue working with MediaVest Manchester.

Agency: Mediaedge:cia Manchester
Spend: £10m
Focus DIY readjusted its business in Q3 last year, making a number of redundancies and closing a distribution centre. But the bulk of the 183-store business' credit insurance with suppliers was withdrawn in January. Focus DIY continues to trade with Mediaedge:cia Manchester on independent terms.


Agency: McCann Erickson Birmingham
Spend: £24m
Last May, MFI Retail pulled its business out of M&C Saatchi and ZenithOptimedia after difficulties securing credit insurance on its £24m media spend. The account was absorbed by McCann Erickson Birmingham, which was left with bills when MFI went into administration. The expense of the gamble was reported as £900,000, although chief executive Dean Lovett insists the agency was able to reduce this deficit by passing the media space on.

Agency: ZenithOptimedia
Spend: £16.6m
Woolworths fell into the hands of administrator Deloitte after 99 years of trading. Its media business had been handled by ZenithOptimedia for more than 10 years and is believed to be fully insured. The company had been acquired by Shop Direct and will launch as an online retailer, while Brooklyn Brothers has been appointed the firm's creative agency.

All Nielsen figures for the 12 months to end September 2008

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