Atradius is increasing its scrutiny on UK private equity-backed (PE) firms in the wake of 2e2's collapse.
The credit insurer, whose UK business underwrites cover for about 63,000 firms, has set up a new team devoted specifically to covering trade credit risks on PE-backed companies.
Although it did not mention 2e2 by name, Atradius noted that many PE-backed firms are "over-leveraged as a result of aggressive purchasing strategies in 2006 to 2008, at multiples that do not work" – a description that fits 2e2 like a glove.
"This has left many businesses with an overly leveraged balance sheet [and] no immediate solution to their problem, thus falling into ‘zombification'," said Marc Henstridge, director of risk services for Atradius UK and Ireland.
"These businesses are able to pay an element of the cash interest and accrue the remaining, but have no ability to service the debt with capital repayments."
The unit will "identify the specifics involved in each deal" and "work with both the business and PE owner to ensure a sound transfer of information and knowledge", Henstridge explained.
But although Atradius will have been burned by 2e2's demise – the IT service giant collapsed owing at least £100,000 to no fewer than 47 suppliers, many of which will have used trade insurance – Henstridge indicated that the initiative does not equate to it pulling in its horns.
"This in turn will enable us to support businesses that, from a traditional underwriting perspective, might look unsupportable," he pleaded.
Ian Spence, founder of analyst Megabuyte, argued that PE funding structures are often opaque and welcomed any attempt to increase communication between PE firms and insurers.
"I think PE firms will be quite happy to engage with this as they do not want their portfolio companies to struggle to get credit insurance," he said.
Private equity investment in the UK tech space rebounded in 2012 and Spence claimed that most are not that highly leveraged once you probe beneath the headline debt figure.
"2e2 is almost the exception that proves the rule," he said. "A lot of PE-backed businesses look very highly geared but normally they are very sustainable. It would be quite easy for a credit insurer to look at the balance sheet and conclude it's horrible – so more communication to help them understand the sustainability of their numbers can only be a good thing."
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