Bleak times for ASOS PLC (LSE:ASC), which may shortly be cash-strapped after a leading credit insurer cut its cover for its suppliers.
The online fashion retailer looked to move quickly and reassure investors after speculation mounted over the weekend, telling the market it is in the final stages of agreeing on an amendment to the future financial covenants in its revolving credit facility.
Of course, the announcement was just further evidence that one of the biggest lockdown winners is in a tight spot, with shares down 10% to 474p.
Credit insurance for retailers is a vital cog of the machine, one that many would struggle to live without, so having it curtailed, if it happened, would be a huge headache.
Why is credit insurance important?
The Sunday Times reported that Allianz Trade, ASOS's leading credit insurer might reduce cover for its suppliers by more than half.
For a company that has issued a profit warning already this year, that would not be good news.
Credit insurance exists to protect suppliers from buyers. It is basically a guarantee that helps streamline supply chains.
Without credit insurance coverage, suppliers usually require payment upfront rather than providing a line of credit.
Essentially, credit insurers allow retailers to hold stock from their key suppliers.
They “really grease the wheels to make supply chains work and payments smooth,” according to Neil Wilson, an analyst at markets.com.
“Suppliers can deliver and then wait for payment which is a good system for retailers so they don’t need to pay upfront for everything.”
When the system works, it works really well, added Julie Palmer, a partner at corporate restructuring firm Begbies Traynor.
However, as Palmer explains. “when the relationship breaks down, it can break down quite spectacularly.”
The collapse of Toys R Us, in 2017, is one specific example from the fairly recent past.
What does this mean for ASOS?
According to Victoria Scholar, head of investments at interactive investor, this is another problem to add to the FTSE 250 company's growing list.
“With the pandemic online shopping boom fading, painful cost inflation, squeezed UK consumers and a backdrop of volatile financial markets, ASOS has had a difficult time lately with shares down 80% over the past year,” said Scholar.
“When it reports earnings on Wednesday, new CEO José Antonio Ramos Calamonte needs to produce a convincing strategy to reassure investors about how he will reinvigorate the business and its share price performance.”
“ASOS has suffered a series of price target downgrades from the analyst community and shares tumbled in September after a negative read across from rival BooHoo which cut its full-year outlook.”