Trade Credit Insurance Cancelled? GET PRICING NOW
*** Update ***
After this article was published, Gamestop’s CFO Robert Lloyd has resigned. We consider this and other company re-organizations to be a substantial credit negative and are monitoring the situation closely.
Blockbuster Video was once an unstoppable business model. It became the fabric of the U.S. consumer and an experience many of us would share on a Friday night. Then, almost overnight, it changed. GameStop is often compared to Blockbuster. Destined for bankruptcy as gaming retail has left them behind. Digital and online retail is a major challenge and many predict they won’t survive.
After announcing a failure of their buyout attempt, immediate predictions of a GameStop Bankruptcy have become widespread.
Is GameStop a Credit Concern?
In short, yes. However, we don’t believe the situation is as severe as analysts and media are making it.
GameStop has a BB S&P credit rating, one notch below Investment Grade. Additionally, they have free cash flow in excess of $300 million in each of the past ten years. Their risk of GameStop going bankrupt is a result of the business model. However, their financial situation should allow them time to figure things out.
Beyond financials, we put tremendous weight on the finance division of an organization. Notably, GameStop’s CFO Robert Lloyd has a nearly 14 year tenure with the company and has shown a strong ability to maintain a very healthy balance sheet. This has been one of the company’s secret to longevity.
A Dying Business
Continuing to operate a dying business model is becoming increasingly difficult. Banks and hedge funds are skeptical of funding retail and high yield credit’s are quickly losing favor for investors.
If a business model is obviously dying, a strong balance sheet can only take it so far.
A key for GameStop is to quickly pivot strategy. However, this pivot is unlikely to happen until a formal CEO is in place and dedicated to driving the strategy.
View from a Supplier
Many of the larger console manufacturers or video game publishers have started to sell to GameStop through distributors to avoid the credit risk.
While these distributors are highly efficient at delivering product, they operate on thin margins and cannot accept a substantial amount of credit risk without Trade Credit Insurance. Insurance is a typical tool they use to support sales to GameStop and it is usually offered through Euler Hermes or other insurance companies that can cancel the coverage if the credit gets too risky.
However, what happens when Trade Credit Insurance is cancelled? This is where things will get interesting for suppliers…
Plan in Advance
GameStop’s short-term risk may be manageable, however, long-term risk of a GameStop bankruptcy is substantial. Equity markets have lost patience with their business model. If they run into cash challenges, Trade Credit Insurance will be cancelled if not sooner. This cancellation is looking to be eminent.
GameStop presents a perfect opportunity to evaluate a long term or multi-year Receivable Put Option. Under no circumstance can this coverage be cancelled. Additionally, prices will go up substantially when Trade Credit Insurance is cancelled so being pro-active will have great benefits.
Swift Credit Risk is the market leader in providing Receivable Put Options to protect receivables or tenant rent flow from the bankruptcy. We are your consultant to simplify the process and source the lowest cost in the market. Contact us if we can be of assistance as you evaluate a Receivable Put.