Media: All about ... Credit insurance

Media shops could be out of pocket with the credit crunch.

The economic crisis is having an instant impact on the world around it. Last week, for instance, the run on the Icelandic economy prompted Siggi Hall, a famous chef from the island, to tell The Observer: "We will have to go back to the basics now. Icelanders will have to downsize. We will have to eat haddock and Icelandic lamb and forget these imports of goose livers and Japanese soy sauce."

While UK media agencies are hardly teetering on the edge of grim survival, Icelandic-style, they are facing up to the harsh realities of operating in a world where cashflow and credit is drying up for some of their clients.

Last week, media agency chiefs told Campaign that the credit crunch is hitting their ability to gain insurance cover on media spend of vulnerable clients, leaving them exposed to greater risks and potential loss of business.

The issue was thrown into the spotlight when the Financial Times reported that Woolworths has faced difficulties obtaining cover from the three major credit insurers. These are thought to include Euler Hermes, the company that supplies the majority of credit insurance covering media agencies for potential non-payment of media spend by clients.

One agency boss said: "It's become an increasingly massive issue for agencies. Credit insurance is being pulled on clients, especially in the banking and retail sectors, and this is leading to extra hassle and problems in client relationships. Clients can get quite aggressive when you go asking them to pre-pay."

Credit insurance has become such an issue because, when dealing with media owners, agencies act as principals in the client relationship and guarantee expenditure, potentially leaving themselves exposed to seven-figure losses if clients run into difficulties.

Often companies pay suppliers for goods (in this case, media space and services) up to 90 days after receiving them, hence the need for the credit insurance. In the event of this cover being pulled, agencies are usually faced with three options: they could take a risk and take on a client's media spend without cover, insist that the client obtains a bank guarantee to cover spend or, alternatively, that the client pays for its media upfront. As a last resort, they can decide to resign the business.

As economic conditions worsen and big names such as high-street banks and retailers get dragged into negative coverage over their credit worthiness, agencies are likely to face some difficult decisions as the months go on. Jim Marshall, the chairman of Starcom MediaVest Group and chair of the IPA Media Futures Group, says: "Agency exposure is potentially very significant and this will be a concern in the industry. It's something that could turn into a big industry issue - if you look at the share prices today, you wonder if you're going to be able to get credit insurance on some banks."

1. The issue of credit insurance reared its head back in May when it emerged that the £24 million MFI account was moving out of M&C Saatchi and ZenithOptimedia after the agencies raised concerns over its inability to secure credit insurance. It is thought the agencies were reluctant to take a risk on the business and that MFI declined to pre-pay. This resulted in McCann Erickson Birmingham taking on the business, a decision some agency sources say its holding company could regret. However, MFI is continuing to advertise through the downturn with an upbeat national press campaign running last weekend.

2. ZenithOptimedia also handles Woolworths' £16 million media planning and buying business. It is unclear if the agency is yet faced with any issue on the business because sources indicate that Woolworths remains in negotiations over securing insurance with all the major insurers that supply it.

3. Other advertisers that have come under the spotlight include the retailers controlled by the Icelandic group Baugur, including House of Fraser, Oasis and Hamleys. Baugur, which was caught up last week in the Icelandic credit crisis, may find its situation eased by the intervention of Sir Philip Green, the retail billionaire who controls Top Shop and BHS. And sources at Starcom, House of Fraser's media agency, said that, despite reports of discussions with Euler over terms of credit insurance, the retailer's credit status had not changed and that it is not paying for its media upfront.

WHAT IT MEANS FOR ...

AGENCIES

- In short, more hassle and tough decisions on any clients that face difficulties covering their media spend. Jim Marshall, the chairman of Starcom MediaVest Group and chair of the IPA Media Futures Group, comments: "Historically, not being able to get credit insurance on an advertiser was a pretty big event because it was quite rare. But now there is such nervousness around there could be a big problem, leaving agencies faced with the decision whether or not to take a risk."

- Some media networks maintain a global policy of not touching a client without tight conditions, such as pre-payment, in place. However, the rules of engagement could change as greater numbers of clients find it difficult, exposing agencies to greater risk. And for smaller or independent agencies, the decision could be even tougher.

- Euler Hermes issues a monthly credit check to agencies using a "green, amber, red" traffic-light system and agency bosses indicate that increasing numbers of clients are slipping into the amber and red categories.

- On the other hand, one agency chief executive says he hasn't pushed the panic button yet: "There's a whole load of pain coming that hasn't yet been felt. But the truth is, if you look at many of the retailers, for example, they are businesses that are still trading profitably and the fundamentals of their business are OK. But any business that is highly geared is going to find it more difficult to secure terms."