Statement from DRS Bond Management Ltd in response to 'Construction Enquirer' article on 27th April 2020

As the largest independent Surety Bond brokerage in the UK and Ireland, DRS Bond Management Ltd (“DRS”) has read with interest the article published by Construction Enquirer on 27th April 2020 regarding the availability of Performance Bonds for small and medium sized regional contractors and comment as follows:

Capacity

Bond capacity flow was restricted in the initial weeks of lockdown but with greatly increased levels of financial due diligence, bonds continued to be issued, including bonds in excess of £1M.  As the Covid-19 horizon begins to settle, capacity is steadily increasing in line with many sites re-opening (albeit with reduced productivity).  Sureties have maintained high levels of financial due diligence so lead in times for agreeing and issuing bonds have increased.  During lockdown, DRS has arranged an array of multi million GBP/EUR bonds on both sides of the Irish Sea, with the largest being €8M.

Bond Wordings

Bond wording acceptance has tightened.  Sureties’ start points are conditional/on default bonds.  Their willingness to flex to incorporate being bound by an adjudicator’s decision without recourse or having to make an interim payment of up to 100% of bond sum following contractor insolvency have reduced but will be considered commensurate with the strength of the applicant’s financial covenant.

Where Sureties are asked to forego their rights of recourse under their Counter Indemnity (“Priority of Claims”) or even more onerously, are asked to accept a primary obligation under the bond, (which in itself is a contract guarantee and therefore a secondary 0bligation), these are being strongly resisted.

Premium Rates

 As a result of the losses sustained due to contractor insolvencies, particularly in Q4 2019 and Q1 2020, combined with the economic uncertainty resulting from Covid-19, premium rates are trending upwards.  Sureties are not applying “across the board” increases as yet and each applicant is considered based on the strength of their financial covenant and the loss experience in their sub sector.

“Investment Grade” Sureties

There are more than 15 sureties operating in the UK who are “Investment Grade” (“A-“ Standard & Poor’s or equivalent with other ratings agencies).  There are 4 main reinsurers who sit behind the sureties who account for over 90% of reinsured business.  DRS continues to only source Performance, Retention and Advance Payment Bonds from “Investment Grade” Sureties.

Market Functionality

Despite the severity of the Covid-19 pandemic and its commensurate impact on the global economy, the UK and Ireland Surety market is not failing.  Whilst Sureties are underwriting with high levels of financial due diligence, bonds continue to be agreed and issued.  We would welcome the opportunity to speak with contractors who are experiencing difficulty in accessing the capacity they need.

 

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