What is Credit Cover and how may it affect you?

5th June 2019

Credit cover is calculated and held by the DCC in the event that a SEC Party is unable to make payment of their monthly DCC charge. SEC Parties may recently have noticed costs attributed to their Party which have been socialised due to a recent increase in SEC Parties ceasing trading.

Credit cover can reduce the amount that is socialised and it is important that all SEC Parties adhere to the credit cover requirements so as not to enter into Event of Default. Please read on to learn how credit cover is calculated.

Credit cover is set out in Section J3 of the SEC. Credit cover may not be in place where:

  1. A company is not required under the SEC to provide credit cover. If the company ceases trading unexpectedly, and the debt is not picked up by the gaining supplier, costs will be socialised if they cannot be recovered by administrators; or
  2. A SEC Party is required under the Code to provide credit cover, and fails to do so. They are therefore in breach of the Code. If the Party ceases trading, costs may need to be socialised.

The DCC calculates the credit cover requirement for each Party, and the amount that a Party is required to provide varies. The calculation is as follows:

Whereby:

  • Value at Risk = Calculated level of debt.
  • (value of monthly invoice + 40% uplift to account for payments received 6 weeks in arrears)
  • Maximum Credit Value is determined by Independent Credit Agency Assessment.
  • Unsecured Credit Factor is determined by Independent Credit Agency Score.

The DCC endeavour to ensure that costs are not socialised and aim to recover costs from the Insolvency Administration process. Therefore, if costs are socialised amongst SEC Parties and subsequently these costs are recovered, monies will be repaid accordingly.

If you have any questions or concern about credit cover, please contact SECAS@gemserv.com.